Trustees who are demanding more cash from their sponsors in an effort to meet funding targets are paying the price for their previous caution in relation to scheme contributions, says PricewaterhouseCoopers LLP (PwC).

With targets estimated to be £60bn higher than expected by PwC, the firm fears that unaffordable funding demands from trustees will now act as a deterrent for companies that provide defined benefit (DB) pension schemes to employees.

Raj Mody, partner and chief actuary at PwC, said that PwC's 14th Actuarial Assumptions survey had found many cases of trustees injecting "overly prudent margins into their analysis of how much scheme funding is required, without proper regard for the sponsor's circumstances."

"Funding negotiations risk being derailed if all parties do not have the right information at their disposal at the outset of the funding process," he said. "Employers must play their part in articulating their objectives, commercial position and cash constraints. Equally, trustees have the difficult task of challenging their own advisers to ensure the analysis of funding required takes proper account of all relevant factors, especially sponsor covenant."

The UK pension scheme funding report covers schemes with over £100bn of invested assets, and show that recent finding agreements have schemes with ongoing average funding targets reaching 75 per cent of the buy-out cost - in the last two years' surveys, this stood at 70 per cent. This year's result adds £60bn to funding targets. In addition to this, PwC expects to see more cautious funding targets in the future.

"We have seen features in current funding discussions put forward by trustees and their advisers such as 'secondary funding targets', where trustees are encouraged to demand more and more funding over time ultimately aiming for levels near the buy-out cost. This leaves sponsors running to stand still when it comes to finding cash for the pension scheme, and will only further deter the few remaining companies who continue to support defined benefit schemes," added Mody.

- Pensions Age April 2009

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