UK defined benefit pension schemes must look beyond conventional funding arrangements if they are to generate long-term stability, said Aon Hewitt.
In its latest report, the firm said aiming for self-sufficiency alone may not deliver the stability and certainty that DB trustees and sponsors expect, and that new strategies would be needed. Its Pensions stability white paper - turning theory into reality, argued that self-sufficiency is 'expensive' and 'hard to achieve'.
Aon partner Paul McGlone said: 'Even modest risk accumulates over time, assets are volatile and the only way that a sponsor can be sure of not needing to pay more contributions, is to over-fund the scheme substantially.'
A clear disadvantage of over-funding for sponsors was devoting more money in the initial outlay, while another is that extra money presents a higher chance of overpaying. For a scheme to have a 10% chance of future deficit means that there is a 90% chance it will end up having a future surplus, according to the paper.
The majority of UK pension schemes surveyed said that self sufficiency was their main long-term objective, in an Aon Global pension risk survey, last year.
However, McGlone said: 'Sponsors and trustees should look at options outside of the pension scheme, such as contingent assets, to prove the stability required. While contingent assets are not new, as schemes approach full funding we see them having a role to play long-term funding, rather than just being a specialist tool for specific situation.
'We urge trustees and sponsors to review their funding targets and strategies and to take action to reach a position of stability - meaning fewer surprises, less intervention and a reduced chance of eventual surplus or deficit.'