Mercer parent shuts DB scheme to equalise benefits

More DB schemes are closing to future accrual due to the volatility of costs to employers and the desire to create fairness in terms of the benefits provided to employees.

Active members of Mercer's parent scheme scheme will cease to accrue future benefits on a DB basis and will be switched into its £107m defined contribution section from August 1 this year. 

The MMC DB scheme had a funding level of 86 per cent at December 31 2012, according to its latest newsletter. At that point it had 3,487 active members. 

The Mercer section of the scheme was the most funded at 91 per cent during the same period.

Following the 2012 valuation, the scheme agreed a recovery plan with the employer that requires Mercer to make annual contributions totalling £23.4m between 2015 and 2020. These contributions are subject to annual funding tests.

MMC decided to change its pension provision following a regular review of its employee pension arrangements and a consultation with employees, according to a spokesperson for the company. This consultation began in October last year and finished in mid-January. 

The desire to harmonise the benefits of the company’s four subsidiaries was given as the main driver behind the decision. “We are confident that this new arrangement is in line with our goal of providing employees with a pension that is highly competitive, easily understood and treats all colleagues consistently,” said the spokesperson.

Most active members contribute 5 per cent of their pensionable salary into the DB section of the scheme, according to the scheme’s latest newsletter.

The trustee and the company have agreed the contribution rates to be paid by each subsection of MMC until July 31 this year, to cover the cost of benefits that will be earned by active members (see box).

Members of the DB scheme will continue to have their accrued benefits linked to future increases in salary and career average earnings, the newsletter stated.

Employees received a personalised communication informing them of their contribution options, the spokesperson said.

Diminishing returns

The number of DB schemes open to future accrual has dwindled since the late 1990s. Susan Waites, partner at Hymans Robertson, said that typically this has been a cost issue – not only the overall expense levelled at employers but also the volatility of how much they will have to contribute each year. 

“Some of the numbers of active members in these schemes has really dropped down, so you’re spending a lot of money on a relatively small number of people, so it gets harder and harder to justify,” said Waites.

Closing a DB scheme is a listed change under the pension consultation regulations, and under some scheme rules trustee approval may be required.

This means an employer would want to consult employees as a matter of good practice, said Catherine McKenna, partner at law firm Squire Sanders, as well as to ensure they do not breach their duty of good faith.

“In addition to the pension-specific requirements and consultation regulations, when you’re closing a scheme to accrual the employer has to take regard of the employees’ contractual and workplace rights,” said McKenna.

Trustees or employee representatives are often able to negotiate with the employer for benefits such as a more generous rate of employer contribution, either indefinitely or for an agreed amount of time.

When Axa closed its DB scheme to future accrual last summer, it agreed to provide an additional benefit of 5 per cent of pensionable salary each year for three years to all current members of the DB scheme.

“Pension scheme trustees are looking at the best interests of the pension scheme members and they maybe able to gain more favourable terms,” said McKenna.