A recent survey from PricewaterhouseCoopers confirms that employers plan to radically reduce future pension provision. The survey was released contemporaneously with the UK Pensions Regulator’s guidance on its plan to reinforce protection of pension benefits already accrued in defined benefits pension schemes.
The shake-up in defined benefit (DB) pension provision is now being extended to defined contribution (DC) offerings as companies re-evaluate the role that pensions play in overall employee reward and business strategy. Following the 2009 Chancellor’s Budget, just 4% of employers are not planning changes to the DB or DC pensions they provide to their employees. This is according to a survey of 157 UK employers by PricewaterhouseCoopers LLP of which 65 have more than 5,000 UK employees, including 33 from the FTSE100.
The survey's major findings show:
Marc Hommel, partner and UK pensions leader, PricewaterhouseCoopers LLP, commented:
“Our research shows fewer than one in twenty employers expect their defined benefit pension scheme to be open to new members in five years’ time. Furthermore, only about one in five are saying they will not freeze future benefit accrual for existing members, potentially leaving UK businesses with a legacy of ‘zombie’ pension funds.”
“The collapse of future service defined benefit provision is occurring against a backdrop of super-protection for benefits already earned. Future generations will have to do far more for themselves relative to those people who have been lucky enough to belong to a fast-disappearing, defined benefit scheme.”
“Pensions apartheid is upon us, with a growing gap between the relative generosity of the public sector and the intention of more than a third of private sector employers to provide the bare minimum under the 2012 auto-enrolment pension requirements.”
Of the 17% of companies that still offer defined benefit pensions to new employees, only a quarter (27%) intend to retain this option. The research confirmed that 16% of companies have already frozen future benefits accrual for existing members and, of the remainder who have not frozen benefits, only a quarter (26%) intend to definitely continue future accruals: 42% intend to freeze accruals for all employees and a further 32% are undecided. This means that only around 5% of respondents expect to have a DB pension open for new employees in five years time and only 22% are committed to maintaining future benefit accrual for existing scheme members.
The vast majority of respondents (88%) feel the public sector has an unfair advantage in being able to offer quality DB schemes and 92% think pressure to close or reduce public sector DB provision will increase.
The need to reduce cost (68%) and risk (64%) are the main forces for change to occupational provision, while over three-quarters (77%) of respondents say the pensions tax proposals in the Chancellor’s recent Budget will further decrease companies’ motivation to provide both DB and DC pensions.
Marc Hommel, partner and UK pensions leader, PricewaterhouseCoopers LLP, commented:
“A combination of the 2009 budget proposals and the recessionary economic environment are accelerating the shake-up in UK workplace pension provision. Employers are conducting wholesale reviews of the role of pensions as part of their employment deal and a greater diversity in pension provision is resulting. On the one hand, employers’ motivation has waned for complex, costly and risky pension schemes; on the other hand, many wish to find ways to offer tax-effective, long-term savings vehicles, especially in a high tax environment.”
The research found a marked difference between the intentions of companies according to their size. 41% of smaller companies, defined as those with less than 5,000 employees, envisage offering just the bare minimum pensions provision required by law under auto-enrolment from 2012. This compares with one-quarter (25%) of larger counterparts.
Marc Hommel, partner and UK pensions leader, PricewaterhouseCoopers, commented:
“We will see increasing divergence in the pension provision offered by smaller and larger companies. Big blue chips are looking at a range of options for enabling executives and the wider workforce to accumulate retirement savings tax-effectively, with greater choice being offered to individuals, including registered and non-registered pension schemes, share-based arrangements and a wide range of non-pension trust-based arrangements.”
“Companies need to manage the closure or freezing of DB pensions very carefully. While closure reduces future costs and risks, it can result in increased cash calls from trustees at a time when businesses are cash-strapped. That is why some companies are opting to keep defined benefit schemes open to future accrual while reducing the benefit levels considerably.”
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