Almost a quarter (22%) of FTSE 350 defined benefit (DB) pension schemes with rated sponsors expect corporate insolvency before they reach buy-out, according to analysis from Hymans Robertson in its annual FTSE 350 DB Report. 

“This is a timely warning given the increasing numbers of high-profile High Street insolvencies leading to pensions cuts, claims the leading pensions and financial services consultancy,” said Hymans Robertson.

“It cautions that these schemes can expect sponsor insolvency to trigger early wind-up, forcing annuitisation and potentially a haircut to members’ benefits and should be putting measures in place to mitigate this risk.”

Hymans Robertson’s FTSE 350 DB Report this year looks at how widespread the issue of insolvency could become and shows that when corporate default probabilities of less than 50% are considered, the position becomes even more stark.

The research shows, for example, that almost half of schemes (43%) with rated sponsors have a 33% chance of corporate default before they reach buy-out. 

Alistair Russell-Smith, Head of Corporate DB, Hymans Robertson, said: “DB schemes with a significant risk of corporate default ahead of reaching buy-out should be looking at ways to mitigate the risk of sponsor default forcing early wind-up and members’ benefits facing haircuts. 

“Providing security to the scheme can help by improving scheme recovery on insolvency. 

“But it does not prevent the insolvency event triggering wind-up in the first place. 

“Schemes should look at all options, and newly emerging solutions such as capital backed solutions and superfunds can protect against this risk by providing a financial covenant to fall back on in the event of sponsor insolvency.”