Anthony Hilton: Let’s avert pensions crisis while there is still time

These are not simple sums. One of the more creative of the investment consultants, Punter Southall, has long argued that you cannot properly assess the health of a pension scheme without modelling the complex interactions between the amount of money already in there, the strength of the employer’s covenant and the investment strategy and its split between equities, bonds and property.

And, in an age where figures for pension deficits are bandied around as if they are a universal truth, they have also been refreshingly clear on the doubts which accompany their assessments.

So complex are the relationships and so long the time horizons, that even the smallest tweak to any of those key components of covenant, investment strategy or funding can make a fundamental difference to the outcome.

But even with those caveats their conclusions are startling. A paper written by Richard Jones and various colleagues and published by the firm yesterday concludes that there is a one-in-five risk of failure among the defined-benefit pension schemes of even the most blue-chip, financially strong and highly rated employers.

Obviously, when all companies are taken into account, the odds are shorter with only one in three defined-benefit pension schemes in a position to pay all members in full when the time comes.

Though the statistic is stark it is roughly in line with recent experience. The pension protection fund was created in 2005 to provide a safety net for pension schemes which were in trouble.

Since then some 10% of defined-benefit schemes have failed to deliver and around 1% of schemes join them every year. So at the present rate of failure, in about 20 years, one-third of schemes would be inside the fund.

This does not, of course, mean that the members will receive nothing, though that is possible. What tends to happen instead is that everyone gets less than they expected — their actual pension is cut or — in the case of higher earners — capped, annual increments to cope with inflation are scrapped, and benefits to a surviving spouse are reduced.

In essence the limited amount of money which is available is spread around as fairly as the law allows.

But if so many schemes look to be having a starring role in a slow-motion train crash, then it does raise the question of what can be done about it while there is still time. And the answer seems to be that we have to get smarter in our analysis and more sophisticated in our responses.

At present, although most trustees are alive to the danger, the current range of strategies employed — including investing in less risky assets and securing increased payments from the employer — may not be sufficient to do the job.

And it is in the nature of these things that the longer the recovery plan put in place to get a pension scheme back to health, the less likely it is to succeed, because there is so much more time for something else to go wrong. It appears that everybody, including the advisers, needs to raise their game.