Data in the new edition of the Purple Book, published by the Pensions Regulator and the Pension Protection Fund, shows a continuing rise in the proportion of defined benefit schemes that are closed not only to new entrants but also to future accrual by existing members. It also points to an estimated £708 billion shortfall between scheme assets in March 2013 and the cost of securing all benefits with insurance companies.
One third of schemes closed to existing members
The Purple Book reports that just 14 per cent of defined benefit schemes remain open to new members. It lists 30 per cent of schemes as being closed to future accrual by existing members, with a further 2 per cent categorised as ‘winding up’ – something that schemes have to close to accrual in order to do. Overall, therefore, just under one third of schemes will no longer have any members adding to their benefit entitlements.
John Ball, head of UK Pensions at Towers Watson, said: “More schemes are going to be frozen over the coming years. Companies struggling to deal with pension deficits will ask whether it is time to stop the problem getting bigger, while State Pension changes mean that keeping schemes going on existing terms will cost employers more from April 2016. In some workplaces, a perception that it is unfair for long-serving employees to keep topping up generous pensions that more recent recruits were never offered can be another catalyst for change.
“While the Government has said it will keep defined benefit pensions in the public sector for at least another 25 years, the overwhelming majority of private sector workers can expect to save in defined contribution schemes – where retirement incomes depend on how investments perform and on the price at which a pot of money can be turned into an annual income. This week, the Government is expected to encourage employers to think again about taking some pension risks off employees’ hands. It is right to want to make this easier, but it will have an uphill struggle – most large firms think they have more than enough pension risk on their hands to start with and have been badly stung by the way that the cost of discharging pension promises has kept going up.”
Buyout deficits exceed £700bn in March
The shortfall between the value of schemes’ assets and the cost of securing the estimated £1.8 trillion of liabilities with insurance companies is estimated at £708 billion in March 2013.
John Ball said: “This is only an indicative number. There is not the capacity for insurers to swallow £1.8 trillion of liabilities in one go rather than just nibbling away a few billion each year. The PPF’s assumptions about buyout costs are also more stable than actual market prices.
“However, it does underline that, for most employers, getting all pension liabilities completely off the balance sheet would still require a significant cash injection. Buyout prices have come down over the past few months, but this will only have made a small dent in these deficits.
“For many employers, the gameplan still involves taking a number of intermediate steps that will reduce pension risk without completely eliminating it. Doing that involves comparing the options available, thinking about the price at which you would be willing to transact, and ensuring that nothing is going to prevent you from seizing an opportunity that may not be around for very long.”
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