Andrew McKinnon, CFO of the Pension Protection Fund (PPF), says he is often asked by peers in the corporate sector why they have to pay an annual levy into the fund’s pot of money every year.
But finance leaders don’t have to look far to see reasons why the fund, that has swelled to £32bn, was set up in 2005. Recent corporate disasters as such as the collapse of outsourcing giant Carillion and high street retailer Bhs are stark reminders of the need for the ‘pensions lifeboat’ to support insolvent pension schemes.
“I’ve spoken to other CFOs who have said what are you doing with all this money? Why do we have to pay so much?” says McKinnon. But he’s quick to explain that aside from the high profile cases there are almost 1,000 pension schemes that have sought protection. “So far 250,000 individuals have come into the fund since inception and we also look after 150,000 members who predate the PPF,” he says, offering a human perspective of the potential catastrophe when pension fund sponsors run into financial difficulty.
Created under the Pensions Act 2004, the PPF started life on 6 April 2005 in response to public concern that when employers sponsoring defined benefit pension schemes became insolvent and scheme members could lose some or all of their pension if the scheme was underfunded.
Besides offering compensation to those pension scheme members affected by insolvencies the government hoped that the existence of the PPF would improve confidence in pension schemes.
McKinnon joined the PPF after a career in “blue-chip organisations”, ranging from training at Ernst & Young, reinsurance giant Swiss Re where he was a reporting manager to JP Morgan Asset Management where he was a group business controller.
But it was the 11 years spent at insurance giant Legal & General where McKinnon undertook a range of finance and commercial roles that provided a broad experiences prior to joining the PPF. “I was a divisional finance director, became the FD of the unit trust operation, then through an organisational restructuring, moved into life and pensions, ending up in product development,” he reveals.
“At the PPF, asset management is a core part of what we do, so it was useful to come from an asset management background, but also commercial roles, as I spent a lot of time understanding what people’s retirement needs are through working on pension products,” he says.
There was also a motivation to help fix things. “As anyone who has been a CFO will know, being able to get under the skin of how business works and articulate it clearly and concisely in plain English is quite a core part of the role,.” He also has a fix-it mentality. “My mother says one of her favourite pictures of me is aged three trying to fix my dad’s lawn mower,” says the Bath University engineering graduate.
There was also the chance to make a positive contribution to society. “The opportunity to provide something that was a real benefit to often quite vulnerable individuals, and society more widely, was something that was quite exciting, and made this feel like something I really wanted to do,” says McKinnon.
Building the lifeboat
When he arrived at the PPF in 2012, McKinnon says the pension landscape was fast changing with many companies moving from defined benefit to defined contribution schemes. “There was a huge problem to solve with massive number of unfunded DB pension schemes, 10.4m people and £1.5tn of liabilities in those funds. When things go wrong with the sponsoring companies and there is a big deficit with the pension scheme, the PPF has to try and pick it up,” he says.
In order to deliver an ongoing remedy to pension schemes becoming insolvent, including “£200bn of funding we’re required to underwrite”, the PPF is answerable to a wide variety of stakeholders including the Department of Work and Pensions (DWP) which has oversight of the fund. “We have to reassure members of the fund that we are financially strong enough to support them, we have to articulate to levy payers how we are charging the levy, why it’s the right level and why we apportion it the way we do,” McKinnon informs.
Therefore, McKinnon has to play a key role in ensuring that all the numbers stack up and are communicated effectively in an annual report of accounts that describes the PPF’s funding and investment strategy. “It gives us a snapshot of where we are at a given moment in time, shows we’re financially strong today and how we support that,” he says. “We try and strike a balance between prudent investment management, not overcharging on the levy while being reasonably confident that as schemes come to us we will be able to take them on,” McKinnon adds.
His role has developed to include not just running the finance function, but also responsibility for the PPF’s actuarial function and developing the fund’s in-house fund management capability. “Part my role is to provide the infrastructure and managing the team that supports all of that,” says McKinnon.
Modelling the future
Over the next couple of years McKinnon will be involved in upgrading technology to enhance the PPF’s long term risk model, which involves the assessment of 5,500 schemes. “It’s possible to envisage a world where all of that can be done using AI tools. I don’t think we’re there yet, but I’m not sure its many years away,” he says.
The fund uses a stochastic approach- a random probability pattern- that is translated into percentage confidence levels. “We literally put a million data sets in it, looking at what might happen, who might claim and what our funding might look like,” he says.
An example of scenario planning would be the impact of a no-deal Brexit. “If I knew exactly what a no-deal Brexit would look like, when it was and what impact it would have, the modelling would be a lot easier, but I am confident we have modeled all the scenarios we can possibly face,” he says.
“We are evolving our funding strategy as we get closer to what we have described as our funding horizon- a time when claims risks would be largely gone, a scenario when everything becomes much more predictable.
“The majority of larger claims that are likely to happen will have started to come in and therefore we will be in a much lower risk scenario where we’re pretty much clear what the environment will be, what the residual claims might be, and everything looks much more certain. We have kind of estimated a period up to 2030, when we wouldn’t have this complex funding strategy- we’d have sufficient reserves to address future uncertainty and changes in longevity,” says McKinnon.
On the customer service side, McKinnon says the PPF’s agenda over the next two to three years is to make customer service operations as digitally enabled as possible. “Our customer service operation is going to grow quite quickly, at a rate we don’t have the ability to predict,” he says.
“We have been quite forward thinking. PPF members are able to deal with their whole retirement process online. We started our retirement online function last year, an example of where we’re trying to be innovative in the industry,” says McKinnon.
Being as efficient and effective as possible across the various functions the PPF has developed is key to minimising the corporate levy, which McKinnon says many companies don’t think they should be paying. “All corporates think they are not going to go bust tomorrow ,” he says.