Around 15,000 people in the UK face losing at least 20 per cent of their pension benefits if DB scheme trustees do not take control of investment strategy says Hewitt.
Hewitt estimates that in there are approximately 75 UK schemes with no resources to combat their deficits. The firm says they face a tough choice between scheme wind up resulting in company insolvency or identifying a winning investment strategy which can grow the assets.
Hewitt argues that faced with mounting deficits and a significant deterioration in the sponsor’s financial health, trustees may be forced to consider the closure of their DB scheme. This in turn may trigger sponsor insolvency as the company is presented with an unaffordable pension debt for payment.
Hewitt says that the only real alternative for trustees in this situation is to reduce deficits with an investment strategy which mitigates uncontrolled risk while driving consistent returns.
Russell Agius principal consultant in Hewitt’s retirement practice, says: “Hewitt calculations show that around 15,000 DB scheme members could lose an estimated fifth of their benefits – valued around £10,000 each – if their scheme enters the PPF. Such an influx of insolvencies would lead to a bigger strain on the PPF, and ultimately the levy payers.”
John Belgrove, principal consultant in Hewitt’s Global Investment Practice, says: “Many UK DB schemes in this situation are running significant risks resulting from their traditional equity heavy narrow strategies, with relatively little governance resource and attention allocated to them. Sponsors rightly cannot stomach the financial roller-coaster ride that is the consequence of static long-term investment thinking, yet closing a pension scheme should only be an action of last resort.”