One in five FTSE 100 DB schemes at risk of failure in stressed scenarios

Written by Talya Misiri

One in five FTSE 100 defined benefit pension schemes are at risk of failure in stressed scenarios such as a potential economic downturn, it has been found.

According to new research from Cardano and Lincoln Pensions, one in five FTSE 100 firms could struggle to meet their commitments to pension scheme members during an economic crisis. With the launch of the firms’ The Worry Index, the level of risk facing the top 100 companies’ pension schemes has risen by around 20 per cent over the last three years.

The research noted that pension scheme risk growth is overtaking supporting businesses, and overall, FTSE 100 pension schemes have also become less secure over that timeframe.

Cardano and Lincoln Pensions’ new index brings together funding, covenant and investment risk measure to provide an all-encompassing view on the health of FTSE 100 DB schemes.

The Worry Index, which also applied the PPF’s stressed scenario to the schemes, also highlighted that 20 per cent of DB schemes would be in the ‘Worry Zone’, defined as pension risks representing 30 per cent or more of the market value of the company.

In the stress scenario, the pension deficit of the FTSE 100 would increase by £100bn, equating to four years of pre-tax profits, assuming they were all directed at aiding the firm’s deficit, the research showed.

Of the firms studied, it was also noted that consumer goods and services in general have seen the largest growth in Worry Scores, while oil and gas saw some improvement in 2017.

Lincoln Pensions chief executive Darren Redmayne said: “The Worry Index is our version of a stress test for pension schemes. A pension is only as good as the covenant standing behind it. This has been sadly demonstrated by cases like BHS and Tata, both were members of the FTSE 100 index in the 1980s.

“Companies need to be around for decades to stand behind defined benefit pension promises. Over such timeframes, markets change and economic events - such as experienced in 2008 - can be expected to occur from time to time. Being able to model the impact of these events is a wake-up call for the industry to more fully adopt integrated risk management as required by the Pensions Regulator.”

Cardano chief executive Kerrin Rosenberg added: “People examine liabilities, investment strategy or covenant strength – the strength of the corporate sponsor – but never as a whole. The Worry Index is one of the most comprehensive analyses of FTSE 100 DB pension schemes ever conducted. It’s the first time that information on funding, investment strategy and covenant have been brought together. In the past, risk has always been assessed in isolation. It helps members answer a critical question, how safe is my pension?”

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