Billions of pounds in UK pension money could be jeopardised because many defined benefit schemes are exposed to too much risk, warned pension consultancy Hymans Robertson.
The consultancy stated this unnecessary level of risk is the bigger issue facing British defined benefit (DB) schemes, rather than companies’ ability to afford the payouts.
Hymans Robertson urged the Department for Work & Pensions to focus on this issue of risk in its defined benefit green paper.
In the paper, published in February, the government proposed creating a defined benefit "superfund" to provide small DB schemes with scale.
However, it has said such a superfund should probably be a voluntary initiative, and should not be run directly by the government.
Overall, the long-awaited green paper was positive about the state of the UK's DB pension schemes, downplaying negative headlines of recent months.
Hymans Robertson estimated that the high level of risk in the system amounts to £423bn in benefits which stand to be lost.
Calum Cooper, head of trustee DB at Hymans Robertson, said focusing on cost efficiency is important, but is not the number one driver for the industry.
He said it was vital instead that the industry recognises the cost of running unnecessary risk.
"It is blatantly clear that DB benefits no longer come with a cast iron guarantee,” Mr Cooper said, pointing to estimates from the Pension Protection Fund which suggested as many as 1,000 sponsors could be insolvent by 2030.
“This needs to be tackled,” he said, suggesting an integrated approach to risk management could tackle the £423bn risks imposed on DB schemes in drawdown.
The trustee boss expressed concern that the DWP paper will focus on short-term deficits, when it could be an opportunity to look at improving outcomes in the long-term.
He said the attention given to deficits has distracted from improving the security of pensions, adding: “As a strategy, simply pouring more money into schemes hasn’t worked for the last 15 years so it is fair to assume it won’t over the next 15.
Rather than creating a ‘superfund’, which fails to remove the risk, he said asset pooling would keep costs down and help manage risks.
Alex Reynolds, financial adviser at Advies Private Clients, agreed that there is a growing problem with DB schemes, which he said is one of the reasons why the transfer values are so attractive at the moment.
“It is clearly a concern for clients as they view these schemes as a guarantee, but this could change if the scheme runs into difficulty in the future.”
Mr Reynolds said further steps need to be taken to protect clients, adding: “I believe that many DB schemes are underfunded and this needs to be more closely monitored and clients made aware of any potential issues building up so they can plan accordingly.
He said underfunded schemes should be forced to make up their deficit over a reasonable timeframe, and should be clear to their employees and past employees about the issues.
katherine.denham@ft.com
