Defined benefit (DB) pension schemes in the private sector are closing to new members at the fastest rate on record, according to research by the National Association of Pension Funds (NAPF).
The NAPF Annual survey, which was conducted among 1,018 pension schemes with a total of nine million members, found that 13% of DB schemes were open to new joiners in 2012, compared with 19% in 2011. According to the NAPF, this is the steepest fall since comparable data begain in 2005 when 43% of DB schemes were open to new members.
The survey also found that the total contributions for defined contribution (DC) pension schemes from both employers and employees reached an all-time high of 12.5% of salary in 2012.
Other survey findings include:
- Nearly 43% of private sector DB schemes are facing closure to new staff in the next five years in favour of a defined contribution (DC) scheme.
- 31% of DB schemes were closed to existing members in 2012 compared with 23% in 2011.
- 29% of DB pensions still open to future contributions from existing members are planning changes in the next few years, including possibly closing the scheme or making it less generous.
Joanne Segars, chief executive at the NAPF (pictured), said: “The pressures on final salary pensions have proven too great for many [employers].
“The growing liabilities fuelled by quantitative easing will have been a factor behind the record hike in closures.
“Those starting a new job in the private sector have next-to-no chance of getting a final salary pension. What was once the norm is now a very rare offer. And those who are currently saving into one may find it gets closed.
“While many have closed their doors, private sector final salary pensions are far from finished. More than two million workers are still saving into one and they pay the pensions of over four million pensioners. It is essential that the government shows them more support in managing some extremely testing economic circumstances.”
The closure of the Barnardo’s final salary scheme is evidence of the pressures which are faced by sponsors of defined benefit (DB) pension schemes. That said, the fact that many DB schemes are still open is remarkable. Rapidly improving life expectancy and low nominal returns make the promise of a defined benefit pension disproportionately expensive.
The number of open schemes also hides the fact that many are only nominally open for a handful of privileged management or executive members. Our evidence of tracking service costs in company accounts conclusively shows that DB provision is falling rapidly even amongst companies with ‘open’ schemes.
The government continues to explore ways of introducing appropriate and affordable levels of risk-sharing between employers and employees. With DB on the decline and the risk of poor returns in your DC pension scheme, ‘defined ambition’ looks to offer a happy medium.
The NAPF correctly identifies a number of factors which have contributed to the closure of schemes, such as the impact of quantitative easing in pushing up the current value of pension scheme liabilities.
The clear message is that private sector employers are no longer prepared to stand behind the risks of operating defined benefit schemes. The future costs remain unknown and too many employers have been damaged by past promises turning out to be far more expensive than anticipated. This has left employers focusing their attention on plugging historical deficits, leaving limited available funds to provide pension benefits for current employees. Employers are rightly not prepared to see their future viability put at risk by continuing these schemes. Indeed many are looking at ways in which the risks associated with past accrual can be better managed.
It is worth remembering that private sector employers do not have the luxury of moving the goalposts on past promises in the same way that the government has done by increasing the state pension age and reducing future pension increases.
This is further depressing evidence about the decline of final salary schemes in the private sector.
It is apparent that many more will find themselves on the slippery slope to oblivion if employers cannot be persuaded to find other ways to keep them open. This will undoubtedly be compounded by the loss of national insurance rebates following the end of contracting-out in 2017 – despite the government’s stated intention to allow employers to lower their commitments without consultation and/or to demand increased contributions from members.
This will not apply to public sector schemes where the employers’ hands are tied by the amazing (to many) undertaking given by the government to Parliament that the public sector pension reforms will endure (i.e. not be changed) for the next 25 years.
The probability of further private sector closures also emphasises the need for a new middle ground between defined benefit and defined contribution, and for the government to bring forward legislation to permit greater risk-sharing models of the defined ambition variety.
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