There is still light at the end of the defined benefit (DB) tunnel, says Hewitt Associates, as closure is not the only option for these schemes.

Research by the global human resources consulting and outsourcing company shows that the majority of UK companies and scheme trustees are seeking alternative solutions to closure of DB pension schemes. However, almost 90 per cent of trustees and sponsors surveyed believe their deficits will increase at their next valuation. Currently, FTSE 100 deficits stand at around £77bn, and scheme liabilities of the 150 UK pension schemes participating in Hewitt's survey are at more than £300bn.

As ways of dealing with this anticipated increase in deficit, 97 per cent of trustees and 79 per cent of companies believe that extending the length of the recovery plan over a longer period of time would help to assist short-term cash flow. A reduction in the rates at which liabilities grow, such as capping pensionable salary increases and using longevity swaps was an option (65 per cent corporate, 63 per cent trustees); allowing for asset out-performance within the recovery plan (50 per cent corporate, 36 per cent trustees); alternative financing (38 per cent corporate, 31 per cent trustees); and reducing the level of prudence included in technical provisions (26 per cent corporate, 31 per cent trustees) were other actions under consideration.

"Burgeoning pension deficits are presenting trustees and sponsors alike with a considerable challenge, and the potential for conflict," commented Kevin Wesbroom, UK lead, global risk services at Hewitt Associates. "But rather than a battle between trustees and sponsors, a new, realistic and longer-term approach is emerging - one that recognises preserving the company's financial health is in the best interests of the scheme and its members."

The alternative finance option is already in use by 50 per cent of those surveyed, such as parental guarantees and bank letters of credit, and Hewitt said this has the advantage of providing members with benefit security should a sponsor fold. Hewitt predicts that this figure will rise to 80 per cent in the next two to three years.

"In these tough economic times, alternative financing can enhance scheme security for members and plug the pension scheme deficits," added Lynda Whitney, pension consultant at Hewitt Associates. "It is proving to be a good bridge for the obvious gap that exists between the employer's desire to manage its cash flow and the trustees' desire to achieve a fully funded pension scheme.

"It's clear that, as alternative finance rises up the agenda, companies are looking at an increasingly varied range of solutions - there is no simple, single answer. The most appropriate solution will be specific to the circumstances of the scheme, and it is important for employers and trustees to take their time to carefully weigh up all the options rather than implement the first available solution."

Hewitt's Pensions Risk Tracker data is available here.

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