LONDON, 14 August 2008 - Even pension schemes of the strongest of companies must ensure they have robust contingency plans in place to protect themselves as economic conditions are increasing the likelihood of insolvency, warns Aon Consulting, a leading pension, benefits and HR consulting firm. However, there is a chance that some trustees could overlook the danger, as Dun & Bradstreet (D&B) failure scores, the Pension Protection Fund's (PPF) primary sponsor insolvency measure, are actually improving and so giving the impression that all is well. 

The PPF in its annual 'Purple Book' states that 0.7% of active companies go into insolvency liquidation each year, but the risk of insolvency is dramatically higher for the 5% of companies with the lowest D&B failure score (i.e. those scoring 1 - 5). Although a primary measure of insolvency risk for the PPF, the D&B score is actually designed to focus on short-term cash flow rather than the overall financial stability. As a result, with D&B failure scores showing consistent improvement, a false sense of security has built up for many trustees and sponsor companies. In reality, though, current economic turmoil means that even robust companies can become vulnerable, sometimes without much warning. If stringent safeguards are not in place this could leave pension schemes exposed.

In the long term, a substantial increase in company failure could prove problematic for the PPF. In turn this could lead to greater levies, depending on the extent to which the PPF has built margins for such factors into its calculations.

Paul McGlone, principal and actuary at Aon Consulting, said: "Trustees must recognise that insolvency risk is now a bigger threat given the economic turmoil, and it would be a mistake to think that it is only those schemes in deficit with weaker employer covenants that are at risk. Strong companies can become weak very quickly and as such it is essential that trustees waste no time in taking steps, if they have not already done so, to make sure their pension scheme is protected should the worst happen.

"Getting such security, however, is easier said than done. There is no simple answer, no 'one size fits all' solution, and security for the pension scheme will almost always have knock-on effects elsewhere in the business. Parent company guarantees offer some form of security, but for smaller companies without this luxury, it is more challenging to ensure protection . It can, for example, be a case of working out where the value exists within the business and then ensuring that the pension scheme gets first call on that value rather than having it gradually whittled away until such time as no value remains, the company goes under and the scheme has no access to what it needs.

"The number of corporate insolvencies is likely to rise over the-short-to-medium-term, increasing the number of schemes dependent on the PPF. We have to hope that type of economic downturn has been factored into the PPF's modelling, so that any increase in cases entering the PPF does not result in premiums being increased further."

For more information contact

Susie Patterson / Leo Wood / Josephine Corbett

0207 269 7250 / 137

susie.patterson@fd.com / leo.wood@fd.com

David Skapinker

020 7505 7478

david.skapinker@aon.co.uk

About Aon Consulting
Aon Consulting is a leading human capital consultancy, helping organisations of every size to attract and keep the employees they need. We advise on all aspects of employment, including health-related insurance and risk; employee compensation and pensions; human resource strategy planning; job design and change management; and staff assessment and legal issues. Aon Consulting is a division of Aon, one of the UK's largest insurance brokers and providers of risk management services and a major force in reinsurance and the UK human capital consulting market. Aon Consulting Limited is authorised and regulated by the Financial Services Authority.

About Aon

Aon Corporation (NYSE: AOC) is the leading global provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting. Through its 36,000 colleagues worldwide, Aon readily delivers distinctive client value via innovative and effective risk management and workforce productivity solutions. Our industry-leading global resources, technical expertise and industry knowledge are delivered locally through more than 500 offices in more than 120 countries. Aon was named the world’s best broker by Euromoney magazine’s 2008 Insurance Survey. In 2008, Aon ranked highest on the Business Insurance ranking of the world’s largest insurance brokers based on commercial retail, wholesale, reinsurance and personal lines brokerage revenues. Aon also was ranked by A.M. Best as the number one insurance broker based on brokerage revenues in 2007 and 2008, and was voted best insurance intermediary, best reinsurance intermediary, and best employee benefits consulting firm in 2007 by the readers of Business Insurance. For more information on Aon, log onto www.aon.com.

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