Aon’s annual Pension Benefits Design Survey of over 300 clients in the private sector has shown that an increasing number of companies are reviewing their UK defined benefit (DB) schemes. Data collected up to the end of Q1 2020 shows that 68% of schemes are now closed to future accrual - 8% more than in last year’s survey.
Dave Hughes, head of Aon’s Benefit Design team, said: “It's no surprise that the trend towards DB closure has continued, but, with our survey showing the trend up to March 2020, the key question now is how the market will respond to the COVID-19 pandemic. Our survey shows a clear link between previous financial turmoil and benefit review activity, so we expect to see an increase in benefit reviews in 2021."
Dave Hughes continued: "We are already working with a number of clients to explore what is right for them and their DB schemes. With a difficult economic outlook ahead, it is difficult to imagine that next year will not see finance directors taking a close look at what will often be the eye watering cost of DB benefits. If you do still have an open DB scheme and aren’t planning to review it now, when would you, if ever?”
Other key trends from the survey:
• 94% of private sector DB schemes are now closed to new entrants
• In 84% of DB closures to accrual in the last four years, employers went beyond the statutory minimum requirements in communicating with affected employees
• In the last four years, 74% of employers closing their DB schemes to accrual offered some form of concession to members compared with the initial proposal. When unions were involved, this rose to 90%.
Dave Hughes said: “When closing a DB scheme to accrual, it's important to guide members through the process – they need to understand why a change is being proposed, what it may mean for them and what they can do to get the best outcome in the future. To support this, personal illustrations, townhall meetings, FAQ documents and one-to-one meetings are becoming common.
“Of course, providing communications support in the current climate brings its own challenges. For those normally based in office environments, we expect to see clients adapt to communicating these difficult messages via video conferencing. But, for example, in manufacturing environments, the approach of holding townhall meetings may no longer work and alternative methods may need to be considered.
“Similarly, the role and influence of unions in these exercises should not be underestimated. Our survey shows that union involvement does have an impact on the level of concessions offered to members. As a result, where unions are involved it is even more important for organisations to think through potential member views ahead of time and as part of a broader DB closure strategy.”
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