UK - Over three-quarters of UK companies believe the plan to reduce higher rate tax relief on pensions has reduced motivation to provide both defined benefit (DB) and defined contribution (DC) schemes, research by PricewaterhouseCooper (PwC) has revealed.

A survey of 157 UK employers showed 96% plan to make changes to their existing workplace pensions as 68% are taking action over concerns about risk, while 60% want to reduce costs and 45% are driven by changes to pension tax relief announced in the April 2009 Budget. (See earlier IPE article: UK Budget cuts higher rate tax relief)

The plans to gradually reduce tax relief on pension contributions for those earning over £150,000 a year from 40% to 20% in 2011 was cited as further reducing "motivation" for 77% of employers to provide workplace pensions on either a DB or DC basis.

Findings from the PwC survey stated 96% of respondents believed DB pensions are unsustainable and 74% are considering stopping future accrual for existing accrual. Of the 17% of companies still offering DB pensions to new employees, just 27% intend to retain this option.

Research also showed that 16% of respondents have already frozen future benefits accrual for existing members while almost half - 42% - intend to freeze accrual for all employees, and a further 32% are undecided.

As a result PwC claimed only around 5% of respondents expect to have a DB pension open for new employees in five years time and only 22% are committed to maintaining future benefit accrual for existing scheme members.

Marc Hommel, partner and UK pensions leader at PwC, warned: "Our research shows fewer than one in 20 employers expect their DB pension scheme to be open to new members in five years' time. Furthermore, only one in five are saying they will not freeze future benefit accrual for existing members, potentially leaving UK businesses with a legacy of ‘zombie' pension funds."

The figures also revealed 41% of smaller employers - those with less than 5,000 employees - and 25% of larger employers intend to only offer the bare minimum pension when auto-enrolment comes into effect in 2012 - giving 3% from the employer, 4% from the employee and 1% in tax relief.

Hommel said: "The collapse of future service DB provision is occurring against a backdrop of super-protection for benefits already earned. Future generations will have to do far more for themselves relative to those people who have been lucky enough to belong to a fast-disappearing, DB scheme."

He suggested the combination of the 2009 budget proposals and the recessionary economic environment is "accelerating the shake-up in UK workplace pension provision" as employers are conducting "wholesale reviews of the role of pensions as part of their employment deal and a greater diversity in pension provision is resulting".

However, while Hommel predicted "increasing divergence" in the pensions offered by small and larger companies, he warned employers need to manage the closure or freezing of DB pensions "very carefully" because it can result in contribution demands from trustees at a time when businesses are "cash-strapped".

"That is why some companies are opting to keep defined benefit schemes open to future accrual while reducing the benefit levels considerably," he added.

Proposals to cut pension tax incentives for higher earners were criticised in a report published by the House of Lords Economic Affairs Committee yesterday, as it warned the move could be seen as the "thin end of the wedge" and risked undermining confidence and damaging pension saving. (See earlier IPE article: Lords warn tax relief cut risks pension damage)

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