Nuclear option of pension scheme closure is becoming the norm

Half the UK companies that still have defined benefit pension schemes expect to have closed them to all employees by 2012, according to new Watson Wyatt research.

The trend means than one million employees currently saving for their retirement through defined benefit pensions may have to rely instead on defined contribution schemes, where retirement incomes are less predictable because they depend on investment returns and the future cost of annuities, says the consultancy. It says not all companies expect to close their defined benefit schemes altogether but very few expect to leave them unchanged.

Watson Wyatt’s research, based on responses from more than 250 employers, shows that only 9 per cent of the defined benefit schemes surveyed have already closed to future accrual by existing members. However, 50 per cent think they will be in this position by 2012.

Three quarters of companies have already closed their schemes to new entrants without yet closing them to existing members. Of companies in this position 48 per cent expect to close their scheme to existing members within three years, a further 28 per cent expect to keep their scheme open to existing members but on less generous terms and 25 per cent do not expect to make any changes. But this includes 16 per cent who have recently made their schemes less generous.

Watson Wyatt concludes that this means less than a tenth of companies with schemes that are closed to new entrants but open to future accrual envisage that, come 2012, their employees will still be accruing benefits on the original terms.

Watson Wyatt believes there are three main factors driving the closure to future accrual: the economic environment, new pension scheme valuation results, and the fact that these trends can be self-perpetuating.

Rash Bhabra, head of corporate consulting at Watson Wyatt, said: “When defined benefit schemes began to close to new entrants, existing members thought they would be unaffected as long as they stayed with the same employer. However, when times are tough, it is hard to justify keeping more generous pension arrangements for a dwindling number of long-serving staff. Those still in defined benefit schemes have been protected from the recent stock market downturn but even they are now going to have to live in a world where it is not the employer’s problem if the money that was put aside will not buy the pension it was supposed to.”