EUROPE - Employers believe sponsor default is pension schemes' primary concern - but pension funds are failing to manage it, according to a report by EDHEC.

A 100-fund survey of pension schemes and their sponsors found 77% of the total sample identified sponsor risk as pension funds' primary concern.

Yet 84% of pension funds did not identify sponsor risk as a concern. Of those polled - with aggregate assets under management of around €730m - 46% held pension fund insurance.

Among other reasons for their apparent unconcern, pension schemes said their scheme sponsor was a government or quasi-government entity, and 4% of respondents have purchased protection from sponsor insolvency.

In contrast, 95% of scheme sponsors - a group with an aggregate balance sheet of more than €5.5trn - identified as their number one concern the economic risk of facing higher than expected pension costs.

Among sponsors, 93% identified accounting risk and the balance sheet volatility created by the difference between the reported cost of pensions on the company's books and the real cost of pensions provision.

The report also identified risks associated with pension funds' investment strategies and biometric risks.
It said: "The separation of powers prevents trustees from managing these assets in the best interest of the sponsor, which can find it difficult to hedge pension risks in its own balance sheet.

"It is because of this separation of powers that many sponsors fail to manage pension risks at all - it also contributes to the termination of many traditional defined-benefit plans."

The majority of those polled operated defined benefit schemes.