Findings of a pensions analysis report show half of FTSE350 DB schemes are already cashflow negative - or soon will be.

Hyman Robertson's 7th annual report found schemes are currently paying out GBP 13bn more a year than they receive in contributions – and it's set to rise to GBP 50bn by 2030.

Jon Hatchett, partner at Hymans Robertson, said the three big positions taken by most schemes have backfired; equities are at half the level expected in 2000, interest rates have increased liabilities by more than 50% and continued rises in longevity have added a further 10-15%.

Hatchett said: "Companies need to learn from the experience of the last 15 years and look for opportunities to make their schemes more resilient to risk, reducing the chance of having to pay in more cash in the future or of being forced sellers of growth assets depressed prices."

Investing in assets that will deliver income to pay pensioners is essential, yet only 4% of schemes see this as a priority, the report found.

Hatchett said companies have to take action to make sure their scheme can generate the required income from its assets.

"They should review whether they have income generating assets in place to meet short term income requirements – growth or illiquid assets can then be used to back longer dated cashflows where there is no immediate need to realise capital," he said.

Next year is big year for DB schemes as April 2016 sees the introduction of further pensions tax changes and the end of contracting out – both of which are likely to prompt companies to review the future cost of DB benefits.

This means closures are likely among the FTSE350 schemes that remain open to accrual due to legislative change.

Hatchett said: "While many companies have adopted a 'wait and see' approach, scheme experience and market solutions are now developing, meaning sponsoring companies should revisit how to help former employees make better informed retirement choices."

"Companies need to understand where the scheme is on the road to reaching maturity, which will help them to prioritise and manage their pension risks, and ultimately delivery more certain outcomes."

First published 22.10.2015

Lindsay.sharman@wilmingtonplc.com