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UK state pension reform to trigger DB scheme closures – Aon Hewitt

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  • UK state pension reform to trigger DB scheme closures – Aon Hewitt

UK – The large majority of companies already planning for the end of contracting out of the UK state pension intend to close their defined benefit (DB) scheme when the change occurs.

According to a survey conducted by Aon Hewitt, out of 91 companies surveyed, one-third are considering how to proceed once the introduction of the single-tier state pension in 2016 brings about the end of the state second pension (S2P).

Of this one-third, the consultancy said that more than half had tabled the option of closing their DB funds to future accrual.

Sponsors will also be able to amend accrual rates as a means of recouping increased national insurance contributions that arise as the pension fund provides benefits in the place of employees joining the then-defunct S2P.

James Patten, head of benefit design, said: "The ending of contracting-out is not just an administrative change – there will also be a considerable financial impact.

"As a consequence of the change, around 2.5% of a DB scheme's membership payroll will typically be added to an employer's national insurance bill.

"Most employers will be able to offset this cost via a slight reduction in the rate of future accrual or by pushing up member-contribution rates by around 2.5% of pay."

He added that Aon Hewitt's research showed that many remained undecided on what changes to enact – and of those that had reached a decision, it appeared "more substantial" changes were on the horizon rather than simple changes to accrual rates.

"We expect many of these closures will occur well ahead of April 2016 as finance directors are faced with difficult results from 2013 and, potentially, 2014 valuations," Patten said.

Pensions minister Steve Webb has previously defended the state pension reform changes against claims they marked a "nail in the coffin" for DB schemes, arguing that there were other problems facing the market.

The Department for Work & Pensions (DWP) was also criticised for its "cavalier" approach to the state pension reform after the implementation date was, at short notice, pulled forward by a year to 2016 – giving pension funds less time to deal with the problems posed by the end of contracting out.

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