The second annual survey of independent trustees by pensions and benefits consultancy Hymans Robertson, has found 'covenant risk' is not being sufficiently accounted for by DB schemes.

Covenant risk is the risk that the sponsoring company will default on pensions commitments, and the survey found this isn't taken into account in strategic investment and funding decisions for a large number of schemes.

Citing the recent failure of the BHS and Tata Steel schemes as an example of sponsor failure, the head of trustee consulting, and partner at Hymans Robertson Calum Cooper, said it was a concern.

"The only risk that really counts in covenant – if there is no scheme sponsor, members typically lose a big chunk of their lifetime savings," he said.

"Although DB risk management is at the forefront of trustees' minds, independent trustees worry that not enough is being done to monitor scheme covenants."

The current cost of covenant risk is a £450bn reduction in the value of benefits, Cooper says it doesn't need to be this high.

"A trustee board's primary responsibility should be to ensure that there is a health scheme sponsor to stand alongside the scheme and this can be a delicate balancing act, especially in the current economic climate."

The solution, Cooper says, is for schemes to set clear objectives and timeframes to get clarity and idea of the scale of the risks schemes are running.

"If schemes continue with heavy foot on the accelerator, we estimate there's a one in six chance of UK DB schemes standing still with deficits remaining at around £1trillion in 20 years' time, despite additional cash injections from sponsors expected to run to hundreds of billions.

Cooper advises schemes to take less risk, and instead look for a steady stream of income over a longer period.

"It's about less pace and more certain progress – there's no rush to get to full funding," he said.

"Some UK schemes will already be clear on their purpose, their risk tolerance, and the journey ahead but even for these schemes, genuine integration of long term covenant risk will improve decision making and lead to more resilient strategies for managing DB schemes."

First published 22.09.2016

Lindsay.sharman@wilmingtonplc.com