DB schemes only open to 14% in ten years - survey

Some 6% of DB schemes have closed to future accrual and the proportion is expected to grow to around 15% of all DB schemes by 2010, and to over 40% in the next five to 10 years.

The consultancy says its research illustrates the continued retreat from DB pension provision. Half the respondents expect to have attempted to remove their DB legacy – through a pensions buyout or other type of transaction – within the next 10 years.

It also reveals an increased focus on defined contribution (DC) schemes, with companies improving the level of contributions and seeking ways to improve member engagement.

“Our survey found organisations acutely focused on the need to manage the cost and risk or DB pensions,” said Kathryn Armitstead, a senior consultant at Watson Wyatt.

“A small but growing number of companies are ceasing final salary accrual for existing members and this trend is expected to accelerate. Others are increasing member contributions or reducing the rate of accrual.

“However, many of the organisations in our survey see great value in providing pension benefits to their staff. With the majority of many organisations’ employees now in a DC scheme, employers are looking to shift resources to DC provision.

"We are seeing employers increase the contribution rates to their DC plans in order to deal with the twin issues of longer life expectancies and low interest rates which are leading to lower benefits than were originally envisaged for members.”

Over 60% of employers believe employer contribution rates to DC plans will be higher over the next five to 10 years than they are now. Total contribution rates to DC plans increased by almost 2% of salary over the last two years to an average 14.7% (and an average 16.9% for plans with matching employer contributions).

The survey also found DC plans now make up 75% of open work-based pension plans and on average employer contributions are worth 9.5% of salary in return for employee contributions of 5.2%.

Almost half of DC plans have take-up rates of less than 60% but this is significantly higher for plans with auto-enrolment.

There is also a widespread acceptance that people will have to work to older ages in the future, and over 90% of organisations believe flexible working will become more common.

The Watson Wyatt Pension Plan Design Survey 2008 focused on larger private sector pension schemes with total assets of over £230bn. Some 75% of the 134 organisations in the survey had more than 1,000 employees in the UK and 30 of the FTSE 100 were represented.

IFAonline

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