87 per cent of trustees have reported that the funding levels of their final salary pension schemes have worsened over the last year, says Aon Consulting.

A survey conducted in February by the firm found that the majority of trustees agree that their cash-strapped companies are experiencing low funding levels - which have raised serious questions over the affordability of employers' covenants.

Trustees completing the survey were also pessimistic about the potential lifespan of their schemes, with only 35 per cent thinking it would last longer than twenty years, down from 52 per cent in February 2008. 30 per cent said they believe the scheme will wind up in the next decade, and 18 per cent said the past year's economic turmoil has made scheme wind up more likely.

The concerns about funding positions have led to 78 per cent of trustees reassessing the strength of the employer covenant, and 34 per cent are discussing their scheme's recovery plan with the sponsor. 77 per cent of these are considering higher cash contributions from the employer as an answer to the covenant problems, although this could become an issue for employers who are aiming to reduce liquidity and the affordability of their final salary schemes.

"The financial crisis has created a number of short term funding problems, but we can
also see the extent of trustees' doubts about the long-term survival of final salary schemes," commented Anthony Light, head of covenant assessment at Aon Consulting. "The results confirm what we are seeing at the moment: trustees are facing some difficult negotiations with scheme sponsors. The critical issue right now is affordability: can cash-strapped employers continue to fund their pension schemes at agreed levels? A significant number of trustees are thinking about higher cash contributions from the sponsor, but this isn't feasible for the majority of companies."

Light added that now is the time for trustees and employers to work together and agree on flexible arrangements to ensure a long-term future for their pension scheme.

- Pensions Age April 2009

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