25% of pension schemes could see no improvement in deficit levels by 2036 unless an integrated approach to risk management is adopted

Key Points from our ‘Better future for DB’ report:

• Only 1/3 schemes are likely to reach funding goals by 2036
• The number of schemes reaching their goals could increase by 50% to 1 in 2 with a fully integrated approach to scheme management that incorporates the risk of sponsor default
• This could be achieved without making further cash calls on sponsors, now and in the future
• Currently 1/4 schemes will see no improvement in deficits over 20 years, but this could go down to 1/12 if an integrated approach that includes investment, covenant risk and contributions is adopted across UK DB

The number of pension schemes facing no improvement in deficits in 20 years could fall dramatically from 25% to 8% if the pensions industry abandons traditional advisory silos and genuinely adopts an integrated and strategic approach to managing scheme risks, our new research report has found.  

The report, which is based on its UK Defined Benefit (DB) Index, powered by 3D analytics which provides real-time updates to the funding positions of DB pension schemes, shows that only 1 in 3 schemes are currently likely to reach their funding goals by 2036. However, this could increase to 1 in 2 if the industry made this shift and responded to calls from the Pensions Regulator to adopt an integrated approach to scheme management.

Commenting, Calum Cooper, Head of Trustee Consulting, said:

“For too long now schemes have tried to view an increasingly complex web of investment, funding and strategy decisions through the narrow filter of deficits and discount rates. While this is a good starting point for schemes to calculate how far they will need to travel in order to secure their member’s benefits, more is needed to provide better outcomes for pensioners. A strategy guided by deficits and discount rates can hinder a schemes’ ability to accurately measure chances of success. By adopting an integrated strategy, a scheme’s chances of success can be improved by 50% from 1 in 3 to 1 in 2, and with no increase in cash contributions from sponsors now or in the future.

“Equities today are half the level predicted back in 2000 while the fall in interest rates has led to a 50% increase in liabilities. These factors, alongside increasing longevity have led to a quadrupling of deficits in the last 15 years to a record £1 trillion. Schemes need clarity now, more than ever, to help them to take informed action and to develop greater resilience to risk. If they don’t, it’s reasonable to expect 25% of schemes will see absolutely no improvement in their deficit in 20 years’ time, by which time they will have paid in a further £100bn or more in contributions to schemes.