Over half (57 per cent) of defined benefit pension schemes have reached a “tipping point” where the risks are dominated by the pensions being paid out of the scheme exceeding the money coming in through active members’ contributions, according to Hymans Robertson.

In its eighth annual Pensions Analysis Report, which looks at DB schemes in the context of companies that support them, Hymans Robertson has concluded that a combination of more scheme closures and ‘freedom and choice’ has led to an increase in the number of schemes becoming cashflow negative.

It said schemes in this position urgently need to turn their attention to cashflow planning. Hymans Robertson head of corporate consulting Jon Hatchett said: “Fifty seven per cent of FTSE350 DB schemes are now in a position where they need to generate income as a priority. If they don’t have clear income-generating strategies in place, they run the very real risk of becoming forced sellers of assets to meet pension payments.

“When schemes have to sell assets in a market downturn they go on a downward spiral, as a greater proportion of the asset base needs to be sold to meet benefits. Remaining funds then have less potential to bounce back when markets recover.

“The Pensions Regulator flagged the importance of cashflow planning for the first time in its 2016 Annual Statement, which acts as a guide to trustees of DB schemes. This is an approach we’ve advocated for some time, and it’s one that schemes need to turn their attention to as a matter of urgency.”

Hatchett said schemes need to do two things when they become cashflow negative. First, they should invest in income-generating assets to meet their cashflow requirements and secondly, they need to ensure they have protection assets in place to hedge against interest rates and inflation.

“This is not a big enough priority for many schemes.Many FTSE350 schemes are still too heavily invested in higher risk, potentially higher returning assets. We would expect lower returns for more mature schemes, to reflect the nature of the investments they should be prioritising,” he said.

“To meet the cashflow challenge, schemes need to have a clear purpose. Many schemes, despite having a very low target level of risk and the destination of buy-out in the future, are still taking a significant amount of investment risk now. The fall in yields post Brexit mean these targets are further away than ever.”

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