The death of defined benefit (DB) pension arrangements has become a global phenomenon with employers grappling with what to replace it with, according to new research from PwC.
PwC surveyed 114 Fortune 500 global multinationals, which together employ 4.7 million people and have combined pension liabilities of $950billion, and found that only 6% wish to perpetuate DB arrangements, where the employer underwrites the costs and risks of providing workers with guaranteed pension incomes. Nine in ten are actively deploying defined contribution (DC) as their predominant workplace retirement provision, with the commensurate transfer in cost and risk from employer to employees.
PwC’s survey found that 83% of multinationals are closing their DB plans to new employees with 71% also intending to freeze DB accruals for their existing employees.
This shift towards DC is prompted by the continuing financial strain and volatile impact on companies of supporting DB pension and healthcare obligations. Almost 80% of respondents said they have global retirement liabilities that exceed a third of their group’s market capitalisation. 88% of companies are concerned about the risks their global DB obligations pose to their balance sheet, with 83% worried about costs, 76% about impacts on cashflows and 58% about impact to credit rating.
To address the remaining big legacy DB liabilities, half of the employers intend exploring options to offer current and former employees cash or other terms to give up legacy liabilities and 45% are actively looking to transfer liabilities to insurance companies, a big opportunity and challenge for the financial services industry.
Marc Hommel, global pensions leader at PwC, said:
“In spite of the best efforts of sponsoring employers, defined benefit pension deficits have remained stubbornly on corporate balance sheets. The size and volatility of these deficits is concerning shareholders and creditors, and is making multinationals more determined than ever to make difficult decisions and reduce the negative impact on their organisation.
“While the death of DB retirement arrangements is not a new phenomenon in the English-speaking world, it is striking how pervasive this has become globally, even in those countries with the most complex and restrictive regulatory and labour environments. Multinationals are resoundingly rejecting the open-ended financial risks of defined benefits.
“As to the future of workplace retirement provision, many employers are still grappling with what to do. There is wide recognition that employers need to innovate to meet the needs of the new world at work.”
While the appetite for providing DB pensions has largely ended, the research reveals that an overwhelming majority (90%) of multinationals still want to play a significant role in the provision of retirement benefits to their employees. Companies recognise that providing retirement benefits is important to maintain their reputation as an employer of choice (93%) and to help them hire and retain the people they want (97%). But only a small number (15%) of employers feel their current benefits policy is sufficiently effective for the new world of work.
Although employers have no appetite to return to the costs and risks of DB, there is growing appetite to invest in “new paternalism”. This is where companies are taking responsibility and investing resources to give employees access to appropriate retirement savings arrangements and to help them make better-informed decisions about their retirement provision. There is also a recognition that employees need to be given greater flexibility in a world of increasing diversity and unpredictability.
Nine in ten companies said it’s important they help employees to make informed decisions about their retirement savings and 83% said they plan to give more flexibility to their employees in the way they save. However, only 11% and 15%, respectively, think they are currently sufficiently effective at doing this.
Marc Hommel, global pensions leader at PwC, said:
“Simply providing defined contribution arrangements for employees is not enough - current arrangements are delivering inadequate retirement savings and are not effective for the new world of work.
“Employers recognise that they need to do more to help employees in their retirement decisions, and that they are currently failing in this aim. Despite employers almost unanimously agreeing that education, empowerment and flexibility are essential ingredients in retirement benefits in the future, there is still a long way to go before this becomes common practice.
“We expect employers to spend more time and money embracing new paternalism as part of their reward strategies. This will be an essential step in creating retirement benefits provision that results in better outcomes for employees and employers alike, within acceptable costs and risks for the employer.”
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