Trustees of struggling final-salary pension plans are being urged to adopt racier investment strategies or risk losing up to £150 million of benefits for thousands of scheme members.

About 75 final-salary pension plans have such large funding shortfalls that they will wind up in the next two years — forcing 15,000 members into the Pension Protection Fund — unless they take radical action, according to Hewitt Associates, a human resources consultancy, but the schemes could be saved if the trustees overhauled their investment strategies, turning to alternative assets, such as derivatives and infrastructure.

Traditionally, final-salary schemes have invested in conventional shares and fixed income, including government bonds. But John Belgrove, the principal consultant in Hewitt’s global investment practice, said that sticking with conventional strategies would fail to save those schemes most at threat of winding up. This, in turn, could trigger company insolvencies as the companies are presented with unaffordable pension debts for payment.

He said: “Many defined-benefit schemes in this situation are running significant risks resulting from their traditional equity-heavy narrow strategies. Sponsors cannot stomach the financial rollercoaster ride that is the consequence of static long-term investment thinking, yet closing a pension scheme should only be an action of last resort.

“Reviewing the scheme’s investment strategy, its current asset allocation and risk exposures is absolutely critical. In today’s complex investment environment, there are options available to trustees that can genuinely improve scheme efficiency and ultimately reduce further potential strain on the Pension Protection Fund.”

Mention of derivatives, swaps and hedge-fund type strategies is bound to raise protests from some trustees, who regard these instruments as complex and, therefore, inherently riskier. However, Hewitt’s approach has some high-profile supporters.

Ros Altmann, a governor of the London School of Economics and a former adviser to the Treasury and No 10 on pensions policy, said: “I wouldn’t say that it is a higher-risk strategy — it is lower risk. What trustees have done so far is take a great bet on the stock market based on the notion that equities will outperform over the longer term.”

Aon Consulting said this month that the stock market revival had helped to narrow the gap between the value of assets and liabilities for the 200 biggest final-salary schemes. But these still stood at £62 billion, down from £78 billion in August.

Larger final-salary schemes have begun adopting alternative techniques in an attempt to control liabilities. However, experts question how easy it would be for smaller schemes to move into the likes of swaps and derivatives. Many pension trustees are amateurs, work part-time and have non-financial backgrounds.

However, Hewitt argues that failure to act will leave scheme members out of pocket. The Pension Protection Fund guarantees all pensions that are already being paid, but only 90 per cent of those yet to be paid, up to a maximum of £28,742 a year for 2009-10. Hewitt calculates that about 15,000 final-salary scheme members could lose an estimated fifth of their benefits — about £10,000 each — if their scheme enters the Pension Protection Fund.

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