Poll predicts cuts in pension schemesMany defined benefit schemes to close to members

18 July 2008

A file showing a pensions document

Four out of 10 defined benefit pension schemes will have closed to existing members within the next 10 years, a new survey says.

Only one in four of the pensions, which includes final salary schemes, is still open to new members, with the figure expected to fall to just 14% during the coming decade, according to consultant Watson Wyatt.

Nearly a quarter of firms have also either increased the amount existing members have to pay into the schemes or reduced the rate at which they accrue benefits.

Existing members

But companies are also closing defined benefit pensions to existing members, as they look to reduce their pensions liabilities.

Just 6% of the schemes are currently closed to future accruals by existing members, but this figure is expected to soar to 40% by 2018.

At the same time, half of companies expect to take steps to get rid of their defined benefit pension legacy during the next 10 years, such as through a pension scheme buyout, under which the scheme is transferred to an insurance company for a one-off cost.

Costs

Kathryn Armitstead, a senior consultant at Watson Wyatt, said: 'Our survey found organisations acutely focused on the need to manage the cost and risk of defined benefit pensions.

'A small but growing number of companies are ceasing final salary accrual for existing members and this trend is expected to accelerate. Others are increasing member contributions or reducing the rate of accrual.'

The research found that 75% of all open work-based pension schemes are now less generous defined contribution ones, under which employers guarantee only how much they will contribute to the scheme and not what it will be worth on retirement.

Resources

But the schemes have relatively low take-up levels, with nearly half having take-up rates of less than 60%, although the figure was significantly higher where firms used auto-enrolment.

Employers are also putting more resources into the schemes, with total contributions by both employers and workers increasing by nearly 2% of workers' pay during the past two years, to average 14.7%.

This figure was made up of average employer contributions of 9.5% of members' pay, while employees contributed around 5.2% of their salary.

Six out of 10 companies, of the 134 private sector firms in the survey, also said they expected to further increase their own contributions to the schemes during the coming 10 years.

© The Press Association. All rights reserved