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1,000 open DB plans could switch to DC [updated]

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  • 1,000 open DB plans could switch to DC - UPDATED

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UK - More than 50% of open defined benefit (DB) pension schemes could close to new members as a result of the economic crisis, according to research by the National Association of Pension Funds (NAPF).

In its survey of 100 pension schemes, entitled ‘Pension Provision and the Economic Crisis’, the NAPF revealed between July 2008 and January 2009 the number of employers with open DB schemes expecting to switch new employees to defined contribution (DC) schemes more than doubled from 21% to 45%.

The findings also showed a further 7% admitted they expected to switch to a new arrangement with more risk-sharing, such as a cash balance, hybrid or career average scheme, which the NAPF said means 52% of DB funds - equivalent to 1,000 schemes - could close to new members, and this is expected “sooner rather than later”.

However, the NAPF suggested employers with closed DB schemes are also feeling the effects of the economic crisis as 27% expect to switch existing members to a DC or hybrid/career average scheme.

The report suggested 600,000 members in the closed DB schemes and just over 800,000 members of open DB schemes could be affected by the planned switch to DC pension schemes.

Results from the NAPF survey showed 96% of respondents believe the economic crisis has made the closure of DB schemes more likely, however Towers Perrin has pointed out while cost is a key driver, another motivating factor behind the switch is equality for employees.

Mark Duke, head of pensions at Towers Perrin, claimed employers have been concerned for some time about having employees doing the same job but earning different pensions, as some could be in the legacy DB section of a scheme and the newer workers in the DC.

He pointed out this means employees are receiving “very different levels of remuneration” so another driver is to get all employees onto the same pension deal and “having a common platform is an extremely desirable effect of closing a DB scheme”.

Duke agreed cost is an issue and there is a “recession agenda” because if there is an opportunity to reduce the costs of the legacy benefits that have “increased exponentially” then employers will take it.

But he added from the employer’s point of view employees should be paid the same “but the pensions bit of the deal means that just isn’t true for many people”, and employers recognise this is “fundamentally wrong”.

A useful by-product of closing the DB scheme may therefore be to get everyone onto the same deal, although “for some employers the equality argument is more significant than the cost argument”.

To try and slow the decline of DB schemes the NAPF has outlined an action plan for the government to provide support for pension schemes. It recommends the government should:

Enhance member security by making the government the ultimate guarantor of the PPF Build member confidence through joint government/industry pension information campaigns Improve scheme efficiencies to reduce costs, for example, by facilitating scheme consolidation Issue more long-dated government gilts to ease funding pressure Help schemes manage liabilities by allowing flexibility in scheme rules on retirement ages and indexation Help schemes manage deficits by allowing longer recovery periods - such as 15 years instead of 10

Joanne Segars, chief executive of the NAPF, said: “These exceptional times call for exceptional measures and new thinking. With so many schemes set to close to new members and employee confidence in pensions evaporating, this is a now or never moment if we want to see DB schemes remain a key part of the UK’s pension landscape.”

But Duke warned while the measures outlined by the NAPF would help employers deal with legacy benefits, and would be beneficial whether or not they decide to close the scheme, it is “very doubtful that in themselves they would be enough” to allow employers to keep DB schemes open.

Instead, he said the focus now should be on delivering money purchase and DC schemes in the best way possible, as “there is a danger people can be fixated on protecting the past but the more important thing is to get it right going forward”.

This is supported by the NAPF research as only 14% of respondents believed the economic crisis would have no impact on the design of DC schemes, and instead 73% expected the falling market and fund values to improve member communication.

In addition, 45% of those who replied to the survey said they believed default funds would be redesigned to reduce volatility and increase protection, while 46% felt lifestyle funds would also need to be redesigned to protect members from very severe falls at key switching points.

In response to the findings of the NAPF survey Rosie Winterton, the pensions minister, said: “We know people are concerned about their pensions in the current climate, but it is important to remember that most employers want to provide a good quality pension provision for their employees.”

“The government is committed to supporting this which is why for those employers with final salary schemes, we have frozen the general and PPF levy and continue to work with groups like NAPF, CBI and TUC to consider what other steps can be taken to ease the regulatory and financial burden on the industry.”

She added: “What is important is that people have the opportunity to save for their retirement and our pension reforms, especially automatic enrolment from 2012, will mean that millions of workers, many for the first time, will gain access to a workplace pension scheme.

“The CBI themselves have, this week,  advised business that while fluctuations in financial markets will affect the value of assets in the short-term, it is the long term return that’s important for pensions.”

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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