Pension scheme trustees often underestimate the risk of their sponsor becoming insolvent when determining their long-term funding plan, it has been suggested.

Speaking at an XPS Pension’s briefing on The Pensions Regulator’s Annual Funding Statement today, 22 May, the firm's head of covenant advisory service, Lorant Porkolab, said that the chances of the employer going insolvent over the next 20 years is typically higher than trustees expect.

According to XPS Pensions, roughly half of FTSE 100 employers have a credit rating of BBB, giving them a 1.7 per cent chance of insolvency over the next five years, but increasing substantially to 10.7 per cent over 20 years.

Porkolab said: “More than half of the FTSE 100 companies are rated BBB, some of them are better, some are more. Over 20 years, which is not too long if you think about the duration of the pension scheme liabilities and pension schemes in general, that 10 per cent is pretty large.”

“These risks of insolvency are often underestimated by, definitely by employers, but by trustees as well.”

For companies that are BB rated, their chance of insolvency triples to 30.2 per cent over 20 years, while almost half (48.1 per cent) of B-rated firms will face insolvency over the same period.

He added that while the strength of the employer covenant is not something the trustee can control, he urged them to monitor the strength of the covenant and scheme funding as a matter of priority.

There have been a number of high profile insolvencies over the past few weeks, with Jamie Oliver's restaurant chain and British Steel the latest firms to collapse.

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