Aon Hewitt has found that the majority of sponsors who currently allow employees to continue building up DB benefits are likely to make pension scheme changes to address the additional costs faced when contracting-out ends in April 2016. However, it warns that a significant number of employers have still not reached a view on the matter and it strongly recommends that they do so by the final quarter of 2014. This should give them sufficient time to plan for implementation and communicating the changes to employees.
Aon Hewitt recently surveyed 299 private sector organisations on both the pension benefit changes they have recently made and - for the 151 organisations continuing to offer contracted-out defined benefit (DB) provision to some employees - how they plan to handle the ending of contracting-out.
James Patten, head of Pension Benefit Design at Aon Hewitt, said:
“From April 2016 employers with contracted-out DB pension schemes will face cost rises of around 2.5% p.a. of their DB payroll. Around 60% of organisations that have formed a view on how to respond to this, expect to make changes to their benefit terms. Around half of these will simply look to pass the cost onto members by increasing member contributions or reducing accrual rates in DB plans. The other half will go further – most commonly by closing to DB accrual altogether - so a further wave of scheme closures is now expected.
“The remaining 40% of organisations that have reached a view on the matter will look to absorb the costs themselves. This may be a feature of diminishing active memberships in DB plans although it may also mean these employers have to limit pay reviews further in the next couple of years to absorb the costs.”
James Patten continued:
“Our survey confirms that around a quarter of organisations have yet to reach a conclusion on their approach to the end of contracting-out. The level of management time and advisory costs associated with addressing this issue will vary dramatically based on the approach under consideration. In order to appropriately plan for 2015 and to give employees enough time to adjust to the changes - which may have a significant impact on their take-home pay from April 2016 - we are therefore encouraging employers to develop a high-level strategy by Q4 2014.
“Employers are sure to want to limit the amount of management time and cost spent dealing with this so that they can focus on the high-level strategy, particularly given other demands on their resources such as adapting their schemes for the 2014 Budget changes. In response to this, Aon Hewitt has developed an off-the-shelf employee communication package which requires minimal tailoring to individual schemes and will help employers make these changes efficiently.”
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