Companies with defined benefit pension schemes should be doing more to safeguard the value of their pension funds in the event of company failure, says a survey of independent trustees.
The Hyman Robertson second annual independent trustee survey found that 25% believe 'sponsor failure' - known also as 'covenant risk' - poses one of the biggest risks to DB schemes. Yet 43% of the respondents said long-term covenant risk is not integrated into schemes' strategic investment and funding decisions.
Commenting on the survey, Hyman Robertson said: "The risk that a sponsoring company will default on pension commitments is not being sufficiently accounted for in strategic investment and funding decisions for a large number of BD schemes."
Calum Cooper, partner and head of Trustee Consulting at Hymans Robertson, said: ""Recent high-profile examples of sponsor failure, most notably BHS and Tata Steel, serve as a salutary reminder to trustees of the importance of covenant risk.
"Independent trustees worry that not enough is being done to monitor scheme covenants. We agree this is a concern. Covenant should be properly accounted for in guiding strategic investment and funding decisions of DB schemes. Currently, the cost of covenant risk is a £450bn reduction in the value of benefits. It needn't be this high."
Cooper added that if schemes continue on their current course "there's a one in six chance of UK DB schemes standing still with deficits remaining at around £1tr in 20 years' time, despite additional cash injections from sponsors expected to run to hundreds of billions."
Cooper urged companies to consider less risky investment strategies. "One way is to instead look for a steady stream of income over a longer period."
Hymans Robertson calculates that in the event of sponsor failure, members would be £23,000 better off if a fully integrated, slower and steadier approach was taken, amounting to £250bn across the UK DB universe.