Almost nine out of 10 companies with DB pensions have reviewed their benefit offering this year — according to Aon’s latest survey.
It found that 72 per cent of these firms ultimately decided to then close the DB scheme to future accrual. This is a 4 per cent increase from the 2020 survey.
The 2022 Defined Benefit Pension Design Survey, which tracks trends across the sector, found that a total of 94 per cent of DB schemes in the UK are now closed to new entrants. It said that its survey, of 330 DB schemes, found that 12 per cent had made no changes to benefit design to date — this compared to 15 per cent back in 2020.
Commenting on this latest data, Aon partner James Patten says: “Increased closure of DB schemes was a pattern we saw emerge after the 2008 financial crisis and it seems possible that it could be repeated as we go into 2023, with organisations navigating new forms of volatility.
“Furthermore, following the rise in gilt yields, the size of the gap between projected DB and defined contribution (DC) benefits for members after DB closure is a lot narrower.
“This all potentially means the news of closure may be less difficult for employees to accept. Given these factors, some employers may therefore take the view that now is the right time to embark on a potentially sensitive project.”
He adds:“With the recent market volatility and improvement in funding levels, there is another driver in play. For many schemes, closure to future accrual would also be a key step in preparing to buyout benefits with insurers. Some schemes that had closed to accrual and retained a salary link on past service will also be seeking to change these ahead of a buyout.”
With all this activity, the survey also shows that there is a greater focus on the communication strategy in benefit reviews. In the last five years, 87 percent of DB closures have offered member support over and above the statutory minimum consultation requirements.
Patten points out that there is now an increased emphasis on one-to-one meetings with professional advisers, offering personal illustrations that show the impact of the proposals, as well as town hall meetings and dedicated mailboxes.
“Experience shows that direct and open communication with members — helping them to understand the changes and the impact on them as individuals — has become more important to the ultimate success of a DB closure.”
The 2020 survey also highlighted the importance of concessions, where benefits are improved beyond the employer’s current approach for new hires in a DC environment, and that continued in 2022. Enhanced ancillary benefits such as life cover and redundancy terms, as well as higher DC contribution rates, remain the most popular, alongside cash lump sums.
Patten said: “This is a trend we’ve seen grow since 2020 from 62 percent to 68 percent. Our expectation is that it’s also a trend that is going to continue – members clearly value these benefits highly and they can make a difference to the way the overall proposals are received.”
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