What is the Pension Protection Fund’s new sustainability strategy? How would proposals about expanding the organisation’s remit impact DB schemes? Kate Jones, who chairs the PPF, shares her plans for the UK pensions lifeboat fund in the latest mallowstreet talks podcast. 

   

    

mallowstreet: Kate, the Pension Protection Fund recently launched a sustainability strategy. Can you tell us more about that? 

 

Kate Jones: Yes, delighted to. I'm really grateful for the chance to talk to you about this today. It's a subject I'm pretty passionate about, growing our funds to ensure our members can receive the very best returns that we can deliver, but while doing business sustainably and making a real difference to the people and the communities that we serve. 

 

And I mean, in reality, you can't turn on the news at the moment without being struck, whether that's about the heatwaves or wildfires that are impacting so many people, all the stories of social inequality. So we believe it's really important that we consider the material [environmental, social and governance] risks and the opportunities, not only in our investment decisions, but across all of our activities and our decisions as a business. So our new sustainability strategy is the culmination of about 18 months of work, and it really brings together key elements of the way that we approach responsible investing, but also diversity, inclusion and community impact.  

 

And what I love about the PPF is the PPF is an organisation that loves detail and data. And so we've taken a really data-led approach to understanding the detail and getting the facts and the figures to determine a baseline, rather than kind of plucking some targets out of the air, whether that's getting a baseline for our diversity data or understanding the climate risk profile of our portfolio, which is pretty diverse. It's taken a lot of time and focus. In some areas like D&I and responsible investments, actually we've been working at that for years, and we're pretty clear on the issues and we've already been working to address them. I think in other areas like emissions of our own business supply chain, we're actually gathering data for the first time. So that has been time consuming, actually at times kind of quite painful, but that has now allowed us to set some really tangible targets as part of our sustainability strategy. For example, I'm sure you're familiar with the scope one, two and three categories of emissions, scope one and two being the greenhouse gases that we make directly as a business and we can control, heating and cooling our business for example, our building. But scope three, I think this is where the real gains can be made, and this is where we need to look further into our supply chain or in our investments. 

We've recognised that we're already net zero in our own operations, but we believe in order to truly deliver on a net zero commitment that we need to address scope three as well. And that's something that we're planning to achieve in our operations by 2035.  

 

But we've also set ourselves some other quite specific targets. In D&I, we set ourselves targets of having 30% ethnic minority representation across the business by the end of this year and for 45% of our senior roles to be held by women – challenging targets that we think are inspiring to the team.  

 

In our investments, we've created quite a specific climate watchlist of 80 portfolio companies. Through that analysis I was talking about earlier, we've identified that they are going to account for the majority of our financed emissions. So we're going to be working with each of those companies to create really detailed transition plans. 

 

And finally, just in the community impact part of our sustainability strategy, we've set ourselves a minimum target of 500 days to give back across the organisation. And for us, it's about creating that real connectivity into the local community. We're based in Croydon and have been working with a local Croydon charity. 

 

mallowstreet: The PPF already has a responsible investment strategy. Is there a difference between the sustainability strategy and the responsible investment strategy? 

 

KJ: It's a really good question. Investing responsibly has always been at the heart of how we've managed our investment portfolios. And we believe that's really critical to giving sustainable returns for all of our stakeholders. 

 

We do recognise that by far the greatest impact of the PPF lies with our investment portfolios. We'd originally built our responsible investment strategy to enhance the long-term value of our investments by managing the ESG risks and opportunities. So RI remains a major part of our sustainability strategy, and we're going to continue to incorporate ESG risks and opportunities into our investment process.  

 

However, by thinking about RI as part of our overall sustainability strategy, it's given us the opportunity to reflect that we want to really identify opportunities to collaborate and to be leading by example within the pensions industry and the asset management communities, so putting it as part of a much broader focus for us. 

 

mallowstreet: You mentioned earlier that you've got net zero commitments for the operations for 2035 and your portfolio is your scope three emissions. Are you planning on setting any targets there or do you think that's not really the right approach? 

 

KJ: In our [Task Force on Climate-related Financial Disclosures] report last year we've been doing a huge exercise on baselining our portfolio and because a large part of our portfolio is in private assets, we've had to take quite an innovative approach. We've been working closely with Ortec Finance on some really interesting, innovative ways to get that baseline for the portfolio, and we'll shortly be publishing our next TCFD report. So at this point we're not going as far as putting targets on this. We've been wanting to really understand where we are, but that has enabled us to identify those 80 portfolio companies that I mentioned earlier where we've identified they're our biggest contributors already. So we can now start having a kind of a very targeted plan working with the companies that we know are contributing most to the implied temperature rise in our portfolio.  

 

mallowstreet: The PPF had a departmental review last year carried out by Lesley Titcomb, the former chief executive of the Pensions Regulator. She suggested that the PPF should share best practice on investments and on responsible investment in particular, and just be out there more and lead the industry and collaborate. How are you going to do that? 

 

KJ: We don't think it's necessarily about telling people what to do but we do want to be collaborating and sharing that best practice given the fairly unique position that we come from as a public body. We really want to set an industry standard in our approach to responsible investing – firstly by doing our really detailed analysis of understanding our risks but through doing that set really clear expectations of our asset managers and by pushing off our managers across all the asset classes to really step up their climate-related reporting and encourage them to set the very best in class reporting standards. By raising our reporting requirements, we help accelerate that industry change because they're then able to use those templates for others. 

 

But it is also just about sharing what we've learnt with others who just won't have access to the knowledge and resources that we do. So we do think this is about collaboration, and our subject matter experts from all parts of our business, particularly in our investment team, are joining those industry groups to really lead and share those best practices. We think that's the very best way that we can collaborate and share what we're doing to enable others to benefit from the work and the resources that we have. We'd really encourage others to just be bold and join us on this journey. I think that's the way we're all going to be moving forward. 

 

mallowstreet: Obviously this is quite governance-heavy, and the PPF, unlike a lot of schemes, can rely on an in-house investment team among others. Oliver Morley, the chief executive, actually said recently that that was quite an important factor in the scheme not suffering during the liability-driven investments crisis last year. To what extent would you say this internal function is being leant on, how important is it for the success? And what should schemes do if they don't have that? 

 

KJ: As you say, the direct impact of the [LDI] situation on the PPF was pretty limited. We were never in a situation where we needed to forced-sell any of our assets and managing that strategy in-house did mean we had a real-time view of our position and were able to react very quickly. We have an excellent in-house investment operations team who could oversee the transfer of the extra security we needed to pledge. 

 

In terms of your point about what can others do, we do really welcome the government's recent Mansion House reform package, and in particular [the Department for Work and Pensions’] call for evidence, which is really looking at the options for [defined benefit] schemes and how DB schemes can better support the economy. 

 

That call for evidence does recognise that the DB universe is highly, highly fragmented. We support over 5,000 schemes, and many of these are very, very small both in terms of members and assets. What we do know is from experience, smaller schemes can lack the scale and the opportunities that bigger schemes have access to, whether that's in terms of accessing a wide range of investment opportunities or indeed endgame solutions such as buyouts. So we'll absolutely be submitting evidence into the call for evidence on the various options that government is considering. 

 

mallowstreet: You've mentioned the fragmentation of the DB universe. That sort of points towards consolidation. In the review last year, Lesley Titcomb also said that the PPF should act as a consolidator for pension schemes that can't consolidate elsewhere, and that's been picked up in the call for evidence. Can you explain a bit more about that? What conditions would schemes and employers need to meet in your view? How would it impact the PPF levy, if at all, and what are generally the potential pros and cons? 

 

KJ: This call for evidence is raising that option of us acting as a consolidator for solvent schemes, and I think that's important as opposed to the current fund, which requires the employer to have become insolvent to come to us. We will be inputting into the government's questions that they're asking about the structure and the entry requirements.  

 

In terms of your question on the levy, I think it's just important to note that we already manage two separate funds. We already manage the Protection Fund and the Fraud Compensation Fund. There's no cross-subsidy between the two. So for us, that's demonstrating that it would be perfectly possible for us to set up a new fund completely separate to the Pension Protection Fund but still being managed by us as an organisation. So I think some of these comments about how it would impact the levy, we need to be thinking of anything that might be used for solvent schemes potentially as fundamentally separate to other things that we do. 

 

But we do recognise that through the existing PPF fund we’ve already consolidated more than 1,000 schemes. So we've shown that we can successfully generate returns through investing in growth assets, and we are willing and ready to play our part if called upon. 

 

mallowstreet: Some people have raised concerns about potential moral hazard. What would you say to that? 

 

KJ: The last few months have been very interesting. There have been lots of very different perspectives shared by all kinds of parts of the industry and I think any change in policy or regulation, as ever, needs to be really, really thought through to be understanding the implications and ensuring that it doesn't to a point create a moral hazard or unintended consequences, even if it's coming from the right desire to create better outcomes for DB schemes. 

 

mallowstreet: The PPF has done very well, it's got more than £12bn in reserves now, a funding level of about 156%. That's attracted interest in what happens to the surplus now that a lot of DB schemes are also well funded. What do you think would be a fair proposal? 

 

KJ: We've spent the last couple of years really looking at our funding strategy, and we published that new funding strategy last year. That gave us the confidence that we could really start to bring down the levy without risking the security of member benefits. Last year we halved the levy, and it's come down from over £600m in 2020/2021 to £200m in the current year. 

 

Our expectation is that reliance on the levy is going to further reduce. But there are still a number of factors that could impact the PPF balance sheet. Members might still live longer than expected. The cost of compensation in that case would be higher. And there always remains a risk of future claims, although we do recognise that's much lower than it has been for many years. 

 

But I think it's important to emphasise that our reserves aren't a surplus per se on our existing membership. They really are an insurance policy that we're able to meet our commitments to any DB scheme that needs us for the long term. So our strategy is to just ensure that we're sufficiently funded to pay compensation to current members, as well as any future members, for as long as they're needed. 

 

mallowstreet: In her review, Lesley Titcomb also said or suggested that you, as the new chair, should have a chance to build relationships with key senior people in the DWP, and should meet the pensions minister twice a year together with the chief executive of the PPF, with a focus on the strategic challenges, risks and opportunities facing the fund. I think there was an impression that perhaps the communication with the DWP wasn't as good as it could have been at the time. Has that changed or how is the relationship with the DWP changing? 

 

KJ: The simple answer is yes. I was only a few months into my role when that review was done, and I'm really pleased that over the last two years, Oliver and I have had a number of really interesting and very fruitful discussions with both Laura Trott, the pensions minister, as well as other senior DWP officials. I've also had the chance to develop some really strong relationships with the chairs of other arm’s length bodies but also the chair and the chief executive of the Pensions Regulator and across wider government. It's been a really interesting couple of years, and I've really enjoyed developing those relationships. 

 

mallowstreet: As you said, you're now just over two years into a five-year term as chair. What are the things you're hoping to achieve over the next three years? 

 

KJ: I can't believe I'm two years in already, and I guess it does make you reflect on what you've achieved already. In those first two years I'm particularly proud of the sustainability strategy launch and the completion of our funding strategy, which were culminations of really multi-year pieces of work.  

 

In the next three, I'm really keen to see the impact of us looking up and out more, which is something I've been focussing on since I took on the chair role and a message I've been giving to the organisation. I'm really delighted to see us start engaging more with external groups to be sharing what we're doing. 

 

And lastly, even though we're now only one year into our three-year strategic plan, we actually need to start thinking about the next one. So I'm really excited to be leading the board through the formation of the new strategic plan which will be a key priority for us all through 2024. 

 

mallowstreet: Kate, thank you so much for sharing some of your thoughts and plans today.