One in three UK defined benefit (DB) schemes is at risk of not paying members the full benefits promised in retirement, research from Punter Southall Transaction Services has discovered.
The Risk of Ruin report examined the health of DB schemes in various scenarios, including investment strategies and changes to funding against covenant strength.
The main findings were that a strong covenant is crucial to a scheme keeping its promises, but only one in five schemes has a high chance of delivering full benefits to its members.
Schemes with weak or tending to weak covenants account for 45% of the total, with Punter Southall estimating that the weakest 20% having a 66% chance of disappointing its membership.
The report highlights how important affordability of contributions is with sponsors having to extend their recovery plans beyond the eight year average. This also increases the risk of failing to deal with adverse deviation.
Punter Southall Transaction Services principal Richard Jones said that over the long term, the firm’s projections suggest that around a third of UK schemes will fail to deliver member benefits in full.
He points to more than 10% of DB schemes have not delivered the benefits promised in full since 2005 as an example, while 1% of schemes fail each year.
“By looking at the combined risks to member benefits presented by covenant, funding and investment decisions in an integrated risk management framework, we can see that some steps favoured by trustees in managing their schemes – such as acceleration of deficit payments and de-risking – may not be significant in reducing the chances of members not receiving their benefits in full,” Jones said.
