UK

January 11, 2007

Defined benefit(DB) pension funds will be extinct in the UK by 2012, according to a report published by consultancy Towers Perrin.

The firm’s annual survey of 170 corporate pension plans found that in 2006 only 21% of respondents – 32 companies – offered new employees defined-benefit (DB) plans. Of these, 11 planned to stop offering them within two years.

“The period 2012—2015 will be a big junction for state pensions,” said David Bird, a senior consultant at Towers Perrin. “Then those companies doggedly remaining with final-salary pension schemes will say: ‘We’ve had enough.’”

Almost half of the companies polled have also clawed back pension provision for existing employees. Yet there is still a wide gap between DB value and defined contributions (DC), with average employer contributions to new DC plans at 6.9% compared with an average DB cost of 15—20% of payroll.

Apart from the public sector, which had “little impact” on trends in the private sector, Bird identified a prevalence of DB schemes in only the oil business,where companies benefiting from high oil prices have used them to recruit in a small talent pool, and privatised utilities.

“Quasi-monopolistic utilities all come at it with DB backgrounds and a civil service model. But it beggars belief that the UK economy would have one sector with pension funds based on a pricing formula worked out with the regulator every couple of years.”

In contrast, he pointed out that the closure of the RBS DB pension fund to new members last year had left the financial services sector without a single open final-salary scheme. “Where they’ve gone, others will follow,” he said.

The report’s authors also treat with caution evidence from earlier surveys indicating pension plans as a retention factor.

“Some employee turnover is healthy for companies,” the report says. “Locking in a group of employees for no other reason other than they were there when company pension provision changed makes no business sense.”