Financial Risks and the Pension Protection Fund: Can it Survive Them?

TL;DR

This paper analyzes the financial risks confronting the UK Pension Protection Fund, comparing regulatory approaches and international models, concluding that systemic risks threaten its long-term solvency.

Contribution

It provides a comparative analysis of risk management strategies for pension funds and assesses the PPF's vulnerability to systemic and moral hazard risks.

Findings

PPF faces persistent systemic risks.

Lessons from US PBGC inform UK policy.

Long-term insolvency risk due to systemic factors.

Abstract

This paper discusses the financial risks faced by the UK Pension Protection Fund (PPF) and what, if anything, it can do about them. It draws lessons from the regulatory regimes under which other financial institutions, such as banks and insurance companies, operate and asks why pension funds are treated differently. It also reviews the experience with other government-sponsored insurance schemes, such as the US Pension Benefit Guaranty Corporation, upon which the PPF is modelled. We conclude that the PPF will live under the permanent risk of insolvency as a consequence of the moral hazard, adverse selection, and, especially, systemic risks that it faces.