Defined benefit (DB) scheme trustees must take control of investment strategy or risk taking responsibility for a 20 per cent loss on pension benefits for around 15,000 people, warns Hewitt Associates.

The global human resources consulting and outsourcing company believes that a lack of action by trustees could lead to a loss of £150million in pension benefits over the next two years.
"Pension schemes have been hit from both sides by the economic crisis," Russell Agius, principal consultant at Hewitt's retirement practice. "On the one hand, volatile markets have severely impacted asset values and deficits have grown. On the other hand, liquidity and cash flow constraints mean that for an increasing minority of company sponsors, additional contributions to plug growing deficits are now, and for the foreseeable future, out of the question. We estimate that in the UK there are approximately 75 schemes with no resources to combat their deficits. They face a tough choice - scheme wind up resulting in company insolvency or identifying a winning investment strategy which can grow the assets."

Hewitt said there is a danger that increasing deficits and the deterioration in sponsors' finances could force trustees to close their DB scheme, which could in turn trigger insolvency.

"Such an influx of insolvencies would lead to a bigger strain on the PPF, and ultimately the levy payers."

Trustees must now review their investment strategies, and look at their current asset allocation and risk exposures.

John Belgrove, principal consultant in Hewitt's global investment practice, added: "Many UK DB schemes in this situation are running significant risks resulting from their traditional equity heavy narrow strategies, with relatively little governance resource and attention allocated to them. Sponsors rightly cannot stomach the financial rollercoaster ride that is the consequence of static long-term investment thinking, yet closing a pension scheme should only be an action of last resort."

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