One in three UK defined benefit (DB) pension schemes could fail to pay the full level of benefits promised to their members, according to an analysis by consultancy Punter Southall.

In a report, titled Risk of Ruin, Punter Southall also claimed only one in five companies had a “high chance” of paying benefits in full.

The consultancy analysed schemes’ investment, funding, and management strategies along with their sponsors’ covenant strength, with the latter element determined to be “key” to delivering members’ full promised benefits.

“For schemes with a sponsor rated as weak – representing around 20% of total UK DB schemes – the ‘risk of ruin’ is estimated to be 66%,” Punter Southall said.

In addition, the consultancy found that where sponsors shorten their schemes’ deficit recovery periods, including through paying lump sums, this has a “limited impact” on funding levels “as they are just a small acceleration of monies the scheme would expect to receive in any event”.

The Pensions Regulator (TPR) came under pressure last year for being seen to allow some pension schemes – most notably BHS – to have lengthy deficit recovery plans. The BHS pension scheme had agreed a 23-year recovery plan, well above the typical average recovery plan (as recorded by TPR) of eight years.

Punter Southall also argued that sponsoring companies shouldered the investment risk of the pension scheme, meaning derisking strategies made little impact on the ability of the scheme to pay benefits in full.

UK DB schemes connected to bankrupt sponsors are protected by the Pension Protection Fund (PPF). Retired members of underfunded schemes are paid in full, with some limits on annual uplifts. Members yet to retire are paid 90% of their pension payment.

Richard Jones, principal at Punter Southall Transaction Services, said: “Since the introduction of the Pension Protection Fund in 2005, more than 10% of defined benefit schemes have failed to deliver their promised benefits in full and around 1% of schemes fail each year. Over the long term, our projections suggest that around one third of UK schemes will fail to deliver members’ benefits in full.”

Punter Southall’s report, Risk of Ruin, can be found here.

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