The Pension Protection Fund, London, achieved a 1.9% investment return on its growth assets and saw its funding ratio increase to 156% for the year ended March 31, despite a challenging year in markets.

The investment return was 7.6% and the funding ratio was 137.9% for the year ended March 31, 2022.

Reserves — held to ensure the lifeboat fund for the defined benefit plans of insolvent U.K. companies can absorb future claims and pay compensation should participants live longer than expected — increased 3.4% to £12.1 billion ($14.9 billion), the PPF said in its annual report published Thursday.

Liabilities fell by more than 25% to £20.3 billion, due to “interest rates increasing materially through the year,” said Barry Kenneth, CIO, in a video on the PPF’s website.

The PPF holds assets “that behave in the same way as our liabilities,” managing interest rate and inflation risk. “Over the last 12 months we’ve had an unprecedented increase in both interest rates and inflation rates,” Mr. Kenneth said, adding that the result was a fall in assets. Assets fell 16.7% to £32.5 billion.

As interest rates and inflation increased “predictably” in the first half of the year, “through prudent rebalancing, we reduced our absolute exposure to higher risk assets, which built up our cash buffers,” the report said.

When interest rates moved materially higher — the Bank of England increased rates to 2.25% in September, compared with 0.25% at the start of 2022 — the PPF allocated some of the cash it had built up to sub five-year corporate bonds, which it said in the report had become “attractively priced. We remained under-risked for most of the year, holding additional cash buffers.”

When the gilt crisis hit in September, “we were prepared. We had the collateral on hand to pay any collateral calls, we didn’t have to sell any assets, and we were prepared for all the eventualities that could come in terms of market disruption,” Mr. Kenneth said in the video.

As of March 31, the PPF’s asset allocation was 49.5% cash and bonds; 26% alternatives including real estate and private equity; 12.9% hybrid assets, which include both hedging and growth characteristics; 6.1% listed equities; and 5.5% absolute-return bonds.

The PPF last year carried out a funding review, finding that it had moved into a new “maturing” phase of its funding journey. As a result, the PPF is lowering the levy paid by all eligible pension funds to grant them access to the lifeboat fund should the sponsoring employer become insolvent. The total levy for 2023-24 is expected to come in at £200 million, down from £390 million in 2022-23.

On Monday, U.K. Chancellor of the Exchequer Jeremy Hunt launched a consultation on the potential for expanding the PPF board’s purview to oversee a consolidator pension fund for any plans that could benefit from being under its auspices.

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