A third of UK defined benefit pension schemes are at risk of failing to pay full member benefits, Punter Southall Transaction Services (PSTS) has said.

According to PSTS Risk of Ruin report, released today 10 July 2017, steps taken by trustees in managing pension scheme risk may not be adequate to avoid the risk of benefits not being paid in full.

The report noted that the strength of the covenant was key when rating the change of being able to deliver member benefits in full. For schemes with a sponsor rated as weak, representing around 20 per cent of total UK DB schemes, the “risk of ruin”, failure to make full payments is estimated to be 66 per cent.

In contrast, for schemes with a strong covenant, the “risk of ruin” is estimated to be one to seven per cent.

PSTS also found that, for the average UK scheme, the issue of affordability of contributions is also considerably important, with employers already having to extend their recovery plans beyond the average period of eight years and experiencing a higher risk of failure due to their inability to deal with adverse deviation.

The report added that increasing the level of technical provisions held by a scheme whilst reducing risks to member benefits can lead to a high price sponsoring employers. PSTS also advised that contingent assets, if structured correctly, can be an effective way of reducing risk of ruin and that trustees should consider providing greater support of liability management exercises put forward by sponsors.

Punter Southall Transaction Services principal Richard Jones said: “Since the introduction of the Pension Protection Fund in 2005, more than 10 per cent of DB schemes have failed to deliver their promised benefits in full and around one per cent of schemes fail each year. Over the long-term, our projections suggest that around one third of UK schemes will fail to deliver members’ benefits in full.”

Jones added: “By looking at the combined risks to member benefits presented by covenant, funding and investment decisions in an integrated risk management framework, 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.

“With the increasing focus of The Pensions Regulator on integrated risk management, trustees can use the technology and modelling tools that underpin our “risk of ruin” report 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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