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Watson sees higher contributions, lower benefits

UK – Watson Wyatt has found that that many companies in the UK are raising member contributions and cutting benefits to cut pension costs.

The findings come after the Bank of England warned companies that such moves would harm their businesses because they would find it harder to attract and keep staff.

"There is a widely-held perception that most companies are closing their final salary schemes to new employees and are switching to pure defined contribution arrangements," said Watson Wyatt partner Colin Singer.

"While there are plenty of employers that are doing this, many others are looking to alternative ways of reducing the costs and risk of running a pension scheme, such as increasing member contribution rates, reducing the level of benefits or using alternative structures such as career average or cash balance plans."

The firm, whose US affiliate is currently embroiled in a billing scandal, said it has surveyed pension funds. More than half of the final salary pension schemes surveyed had carried out a major review in the past 12 months.

“However, less than one in four of those reviewing their plans have decided to close it to new members and offer instead a defined contribution (money purchase)
plan,” Watson said.

The firm found that 59% of final salary schemes were reviewed in the past year. Of these, 32% closed the scheme to new members while allowing existing members to continue to accrue benefits and introduced a new plan for new members. Ten percent had continued to provide a final salary scheme but with lower benefits.

Two percent had closed their scheme not only to new members and to future accrual for existing members.

One feature of the survey is that career average and
cash balance schemes are becoming more popular.

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