Market events of 2020 could lead to a fresh wave of benefit reviews by UK companies and increase the number of pension scheme closures in the comping year, according to a new survey by Aon.
Its annual Pension Benefits Design Survey shows an increasing number of companies in the private sector are reviewing their DB schemes. Data collected up to the end of Q1 2020 shows that 68 per cent of schemes are now closed to future accrual – 8 per cent more than in the previous year’s survey.
The survey showed 94 per cent of private sector DB schemes are now closed to new entrants.
It said that in 84 per cent of closures over the last four years, employers went beyond statutory minimum requirements in communication with affected employees. Over this period 74 per cent of employers closing their DB schemes to accrual offered some form of concession to members compared with the initial proposal.
Aon said that when unions were involved, this rose to 90 per cent.
Dave Hughes, head of Aon’s benefit design team says: “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 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.
“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?”
Hughes adds: “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.
“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.”