Barclays and BP closures could trigger DB domino effect – Hewitt

The recent rash of high profile final salary closures will cause a domino effect of more schemes closing to future defined benefit (DB) accrual than ever before, according to Hewitt.

Last month’s news that Barclays has closed its scheme to future accrual and that BP is closing to new joiners may trigger many more employers to question the value of offering expensive final salary schemes, says the consultancy.

A recent Hewitt survey suggested that more employers were considering closing to DB accrual in 2009 than any other form of benefit change. More than 50 per cent of the 50 companies polled said such a move is under active consideration for implementation this year. But Hewitt points out that closure is not the only option, with the option of capping pensionable pay growth an alternative that can immediately reduce a deficit, without requiring the trustees’ consent.

Tony Baily, principal consultant at Hewitt, says: “The recent proposals by some major companies to close their DB schemes to future accrual could create a domino effect. Investors may begin to challenge some company boards as to why, at a time of recession, they continue to offer generous final salary provision when this could be putting them at a financial disadvantage.”

“Closing to DB accrual will not be easy. Employees may become disengaged and trustees may refuse to agree to such significant changes. However, some major employers have realised that it may well be financially more attractive for companies to retain DB provision – albeit on a low cost basis – by capping pensionable pay growth. Capping pensionable pay growth can immediately reduce the deficit and typically companies don’t need the trustees to agree the change.”