UK defined benefit (DB) schemes may need to find new strategies as current self-sufficiency targets do not provide the required degree of stability and certainty, Aon Hewitt has said.

According to Aon Hewitt's global risk survey last year, over 70% of the 600 trustees and sponsors said that 'self-sufficient' funding positions should provide at least 95% chance of meeting the members' benefits in full.

Almost 80% said that once fully funded, there should be less than a 10% chance of the sponsor needing to pay further contributions.

However, Aon Hewitt said that typical self-sufficiency strategies may not deliver the stability and certainty that trustees and sponsors expect.

Paul McGlone, Aon Hewitt partner, said: "Our findings suggest that true 'self-sufficiency' is expensive and hard to achieve. Even modest risk accumulates over time, assets are volatile and the only way that a sponsor can be sure of not needing to pay more contributions, is to over-fund the scheme substantially."

The firm said there is a clear disadvantage of over-funding for sponsors as it means devoting more money in the initial outlay.

Another is if the extra money means a higher chance of overpaying, so for a scheme to have a 10% chance of future deficit means that there is a 90% chance it will end up having a future surplus.

Aon Hewitt said that the challenge for trustees and sponsors is to balance the need for certainty with the desire not to pay more than required.

McGlone added: "Importantly, creating stability is not just about a decision taking place in the future. For many schemes it should affect their short term decisions. Specifically this will be important for when contributions should be redirected from the scheme itself and into a contingent vehicle outside of the scheme."

Balancing the competing demands of the parties in this way can lead schemes to identify a stability 'sweet spot', which sensibly addresses risk, does not excessively tie up corporate assets and gives a reasonable chance of getting to a buyout target in the long-term.

McGlone said: "We urge trustees and sponsors to review their funding targets and strategies and to take action to reach a position of stability – meaning fewer surprises, less intervention and a reduced chance of eventual surplus or deficit."

First published 24.06.2014

monique_simpson@wilmington.co.uk