PPF unveils model to help calculate long-term risk

The Pension Protection Fund has today unveiled its Long Term Risk Model – a bespoke system that will enable it to calculate the many risks it could face in the years to come.

The model, which has been continually developed over a two year period, will help the PPF to set a stable risk based levy year-on-year which will help the organisation build on its long term stability and ensure that people continue to get the compensation they are entitled to.

Pension Protection Fund Chief Executive Partha Dasgupta said: “The Long Term Risk Model should increase confidence in the PPF as it shows we are developing systems that will enable us to set a levy measured accurately against the risk we face in the years ahead. Levy payers will have a better idea what to expect while compensation recipients will be reassured their payments are coming from a stable and trusted source.

“The PPF is committed to developing innovative solutions. This Model is a fine example of the PPF doing just that and was only made possible by the PPF working in partnership with experts in the fields of credit and investment risk, actuarial science and fund management.”

The Model is based on “stochastic” modelling methods commonly used by insurance companies to estimate what assets and liabilities they have and, therefore, assess how solvent they are.

The PPF has adapted this method to predict the level of risk it would face in various economic conditions. For instance, the model can be used to calculate what might happen to the PPF if there was a major stock market crash or if even in favourable economic conditions one or more big employers with large pension schemes failed.