A “perfect storm” could be awaiting defined benefit (DB) pension schemes when temporary protections from corporate insolvencies are lifted at the end of the year, Aon has warned.

The firm cautioned that the “floodgates might open” once protections are ended as companies will face cash constraints, low interest rates that will increase pension deficits for schemes not fully hedged, and volatile growth asset values.

Aon noted that, if a sponsoring employer is struggling, its pension scheme trustees are obligated to focus on buyout, which increases the demands on the company when they are least affordable.

Furthermore, the Pension Schemes Bill will introduce a requirement to have a cogent long-term funding target whereby the scheme has low dependency on the sponsor by the time it is significantly mature.

“For most schemes, that is 10-15 years’ time, but for some it will be much sooner,” said Aon partner, Peter Redhead.

“This is likely to be significantly more stretching than the current funding regime, with more reliance on cash contribution and less on anticipated investment returns, so new questions are raised.

“If it becomes simply unrealistic for a scheme to achieve a long-term funding target, will company directors risk being accused of insolvent trading? Or instead, might The Pensions Regulator be able to find a way to balance any future requirements to help avoid the unintended consequence of triggering insolvencies?”

Redhead added that it would be better for companies to pre-empt difficulties and pointed to tighter cashflow management, liability management exercises and exploring alternative financing options as traditional options for sponsors.

“There is also one new possibility to add where the sponsor’s covenant is weak but the scheme is, nonetheless, quite well funded - the superfund,” he continued.

“There are circumstances where securing scheme benefits with a superfund will be in members’ and trustees’ interests, as well as allowing the company to free itself entirely of its pension obligations.

“If there is any uncertainty around future business viability, and the ability to support DB pension promises, companies should seek to retain control by considering all options now, including scheme or company refinancing and restructuring.

“This way they can seek to provide protection for members' benefits while securing the company's future. The alternative is to wait and potentially lose control by forcing trustees into making claims as creditors."

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