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The Actuary The magazine of the Institute & Faculty of Actuaries

Third of DB pension schemes could fail to pay members

One in three defined benefit (DB) pension schemes in the UK are at risk of failing to pay their members’ benefits in full, according to research by Punter Southall Transaction Services (PSTS).

Schemes will not deliver on promises ©iStock

It reveals that just one in five schemes have a high chance of being able to deliver on agreements in full, while the same amount have a 66% chance of failing.

In addition, it was found that the typical scheme has already extended recovery plans beyond the average period of eight years, suffering a significantly higher risk of failure as a result.

“Since the introduction of the Pension Protection Fund in 2005, more than 10% of DB schemes have failed to deliver their promised benefits in full and around 1% of schemes fail each year,” PSTS principal, Richard Jones, said.

“Over the long-term, our projections suggest that around one third of UK schemes will fail to deliver members’ benefits in full.”

The research considers pension schemes from an integrated risk management perspective, testing covenant strength against changes to funding and investment/management strategies, using software and modeling tools.

It was found that shorter recovery plans, including paying off deficits by lump sums, have a limited impact on safeguarding benefits, as they are just a small acceleration of monies the scheme would expect to receive any way.

The findings show that investment risk within a pension is borne almost entirely by the sponsoring employer, and that increasing the level of technical provisions held by a scheme, while reducing risks to benefits, can result in a very high price.

Instead, it was concluded that contingent assets could be a very effective method of reducing risk to members’ benefits if they are structured correctly, while trustees should be more supportive of proposed liability management exercises.

“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.

“With the increasing focus of the Pensions Regulator on Integrated Risk Management, trustees can use technology and modelling tools to consider their strategy in the round, taking account of the impact that covenant, funding approach and investment strategy has on the likely outcomes for their members.”

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