Around 20% of FTSE 100 company pension funds would struggle in a recessionary environment, with deficits jumping £100 billion ($132.8 billion).
Research by consultant Cardano and Lincoln Pensions - which was acquired by The Cardano Group - showed about 20% of defined benefit plans would fall into the "worry zone" in an economic downturn. The worry zone is defined as pension fund risk representing 30% or more of the market value of the company.
This type of stress scenario would also see the deficit of these funds increase by £100 billion to £344 billion, which would require four years of pre-tax profit to pay off, said a report on the research.
The firms have launched the "worry index," which brings together three risks facing DB funds into one single measure: funding risk, investment risk and sponsor index. These three risks have been highlighted in guidance by the U.K. Pensions Regulator. The index covers the 77 FTSE 100 companies that had a DB plan as of March 31. The consumer services sector is one at the most risk, the report said.
To reach the "worry score," the firms determined the size of the pension deficit relative to the value of the company. Scores were averaged into the index and modeled under current and stressed conditions as defined by the U.K. Pension Protection Fund, the lifeboat fund for insolvent DB plans.
"People examine liabilities, investment strategy or covenant strength – the strength of the corporate sponsor – but never as a whole," said Kerrin Rosenberg, CEO of Cardano, in a news release accompanying the data. "The worry index is one of the most comprehensive analyses of FTSE 100 defined benefit 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?'"
Darren Redmayne, CEO of Lincoln Pensions, added that the index is the firm's version of a stress test for pension funds.
Cardano has £50 billion in assets under advice and management in the U.K.