UK - Defined benefit schemes backed by weak sponsoring employers adopt more aggressive investment strategies than the funds with stronger sponsors, according to consultants Lane Clark & Peacock (LCP) Prudence Index study.

LCP's study, which was launched last November and surveyed around 150 schemes with an average size of £300m, found that such schemes hold a large proportion of their assets in equities.

"One theory might be that trustees of those schemes, because they are backed by weaker employers, can't see their employers' contributions are going to be the thing that fills up the gap if they have a deficit position," James Hughes, partner at LCP, told IPE. "So their way out of the black hole might be good investment returns and they take a gamble on equity returns to try and achieve that."

LCP warns: "Trustees of these schemes need to take particular care in optimising their funding and investment strategy, as they are simultaneously exposed to high levels of both sponsor risk and investment risk."

However, "the key is that they take an informed decisions, knowing the risks that they are running," Hughes added.

Other findings were that larger schemes and schemes run by larger companies are generally better funded than smaller schemes, and that over half of UK pension schemes have not yet carried out and independent assessment of the employer's covenant, despite calls from the Pensions Regulator.

The index intends to provide trustees and employers with an indicator of the prudence of their scheme's funding and investment strategy relative to other pension schemes.

Hughes commented: "We are still in the early days of the new Scheme Funding regime and it is clear that many trustees are still to get to grips with the new requirements."

Hughes added that as more schemes go through their first new-style valuation, there should be an increasing emphasis on investment risk in the context of the employer's financial strength.