Jim MacLachlan, European head of pension services at S&P, said: “Trustees have a long way to go to understand the significance of the sponsor’s credit strength upon their decision-taking. The new Act in the UK requires trustees to adapt funding and investment policies according to the financial strength of sponsors, but our study shows that such a policy bis in its infancy. Schemes face major challenges living up to these principles.”
The study, which covered the 346 largest private sector defined benefit schemes in the UK, also found no relationship between the scale of scheme deficits and sponsor credit strength. The median FRS17 deficit for schemes sponsored by entities rated AA is 20 per cent while for those in the B category, which carry a higher risk of default, it is 21 per cent.
Mr MacLachlan said “Trustees with weaker sponsors should consider restoring funding levels relatively quickly, given the significant potential for the sponsor to default before full funding of the scheme can be achieved.”
Similarly, the research showed that high equity exposure is almost as prevalent among schemes with financially weak sponsors as among those that have strong sponsors. The median scheme sponsored by entities rated AA has 68 per cent of its portfolio in equities, compared with 64 per cent for those with sponsors rated B.
Mr McLachlan said: “A high equity exposure in the pension scheme compared with bonds, compounds the risk to the security of members’ benefits.”
S&P said pension liabilities represent 18 per cent of the net assets of scheme sponsors and in many cases substantially exceed the resources of the company supporting them.
As a result, S&P said the sponsor’s own financial strength might well depend on the effective management of the risks within the scheme. In total, FRS 17 scheme deficits represent 13 per cent of the net worth of sponsors. HS
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KEY RATIOS RELATIVE TO CREDIT STRENGTH |
