Most corporate sponsors have already considered high level options for de-risking their exposure to defined benefit (DB) pension liabilities. The result being that the vast majority of DB schemes in the UK are closed to new entrants, and more than half are closed to new benefit accrual.

Closing a DB scheme to new members immediately sets a deadline to achieve a low risk position before benefit out-go can become a strain on the funding level.  This is because as schemes become more cashflow negative, a short-term funding shock can soon escalate into a longer-term problem.  After a funding shock the scheme will still be paying pensions out at 100 pence in the pound, while now holding much lower reserves.  This can create a vicious downward spiral of falling funding levels.

As a result, and although most DB schemes must continue to focus on eliminating funding deficits, trustees and corporate sponsors are also increasingly looking to prepare for the low risk phase.