UK pension schemes accounting for around half of all future pension benefits have only a “50/50 chance” of making it to full funding before their sponsor becomes insolvent, putting member benefits at considerable risk, according to the Pensions and Lifetime Savings Association (PLSA).
The finding comes as the DB Taskforce released its interim report into the challenges facing UK defined benefit schemes at the PLSA annual conference in Liverpool.
Speaking to delegates, DB Taskforce chairman Ashock Gupta (pictured) said 65% of schemes with ‘weak’ and 40% with ‘tending to weak’ covenants would be expected to default over the next 30 years.
He added: “Put another way, the last two groups of schemes which account for around half of all future pension benefits, have a roughly 50/50 chance of making it to solvency before the sponsor falls over.”
The Taskforce applied an integrated risk model, called Mousetrap, to bring together asset risk, liability risk and employer solvency risk and applied this to schemes in each of the regulator’s four employer covenant groups: ‘strong’, ‘tending to strong’, ‘tending to weak’ and ‘weak’.
It also found 20% of schemes The Pensions Regulator describes as ‘tending to strong’, accounting for just over a quarter (27%) of liabilities, would be expected to default over the next 30 years.
However, only 6% of schemes with ‘strong covenants’, accounting for just under a quarter (23%) of liabilities, would be expected to default over the next 30 years, the Taskforce’s model found.
“There is much more risk in the system than is generally understood,” Ashock added. “And when we ran a ‘lower for longer’ scenario with sustained low interest rates the risk is even higher.”
Ashock said the Pension Protection Fund (PPF) was “an integral part of the landscape” and did an “invaluable job” in protecting member benefits, but warned the industry to be realistic as to the amount of risk the lifeboat could “take off the table”.
He said: “After you take account of the cap, the 10% haircut for active and deferred members and the wedge between CPI and RPI benefits, in aggregate the PPF leaves members bearing round 20% of the risk, when default occurs.
“Member understanding of this risk is very low.”
