The main risk to scheme funding is the gradual erosion of the pension promise over time as a result of corporate transactions, strategy and performance, rather than the default of the sponsor, a study by Gazelle Pensions Advisory has found.

Analysing the corporate experience of FTSE 100 Index over the past 25 years, Gazelle believes trustees should adjust their expectations of the level of funding risk their schemes are likely to experience over the next 25 years, and questioned whether the current regulatory framework effectively deals with this.

The study found that 7 per cent of the FTSE 100 companies in 1985 defaulted, but 26 per cent experienced a level of financial stress that Gazelle considers would have materially affected their ability to fund their pension schemes.

Furthermore, 83 per cent of companies experienced one or more major corporate transaction, with 55 per cent experiencing takeover, many by overseas multinationals, 40 per cent experiencing demerger or restructuring, and 33 per cent undergoing substantial merger transactions. Gazelle believes this would fundamentally change the strength of the employer covenant. Only 17 companies did not experience takeover, demerger/restructuring or merger.

The study highlighted that the risks to pension funding particularly increase where pension schemes lose their attachment to the operating businesses that historically supported them, as corporate activity very often cuts across the legal structures and asset base to which schemes are attached.

Gazelle said that if companies evolve, change and grow but pension schemes remain only attached to older businesses then their ability to fund pensions will decline over time.

Gazelle chairman Simon Willes said: “These findings highlighting 25 years of relevant covenant experience offer a valuable insight for pension trustees into what they can expect to experience over the remaining lives of their schemes.

“It is not clear that the current pension regulatory framework which has striven to improve the protection of pension schemes on default, effectively deals with the risks to pension scheme funding posed by corporate activity and change. The transaction clearance regime originally showcased is voluntary and appears to be now largely ignored by companies and their advisers. If regulation is about ensuring pensioners do receive pensions from defined benefit schemes, then elevation of the status and ranking of pension schemes from long-term unsecured creditors is central to the debate.”

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