Analysis: The death knell for defined benefit is edging closer, consultants say, as the end of contracting-out, low yields and impending government revisions to pension tax could see all FTSE 250 companies completely close their DB schemes by the end of this year.
By the end of December, the 5,945 schemes covered by the Pension Protection Fund's 7800 index had an aggregate deficit of £222.4bn and a funding ratio of 84.9 per cent. Only 1,266 of those schemes are in surplus.
The lows and lows of DB funding…
Earlier this week, data from consultancy JLT Employee Benefits showed 49 of the companies in the FTSE 250 were still providing DB benefits.
Of these, only 11 provided DB to a “significant number of employees” – defined as incurring ongoing service costs of more than 5 per cent of payroll. Those that incurred ongoing service costs of less than 1 per cent of payroll were ignored.
As soon as they no longer benefit personally there’s no need to fight to keep pension provision
Charles Cowling, JLT
Charles Cowling, director at JLT Employee Benefits, said: “There are two big key changes happening on the sixth of April that if companies needed an excuse to close, this is giving it to them,” adding that the pressure on DB “has been cumulative over the last few years.”
One of these changes is the end of contracting out, which will increase the cost of DB for both schemes and members by introducing national insurance deductions into their contributions.
The other is to tax. Announced in last year's Budget, the lifetime allowance for individuals' pension savings will in April come down to £1m from £1.25m, generating the government an estimated saving of £600m.
Cowling said the reduction of the lifetime and annual allowances would render pensions irrelevant for many at the top level of companies, making them less likely to champion their pension provision on behalf of workers.
“As soon as they no longer benefit personally there’s no need to fight to keep pension provision,” he said.
The government is also deliberating over possible changes to the structure of tax relief and is expected to announce a decision at this year's Budget in March.
One of the proposals is to give savers tax relief at the point of withdrawal rather than upfront, as is the case with Isas. But Cowling said this would be more difficult to implement in the DB environment than defined contribution and could even miss out DB altogether.
It could, he argued, make employers more eager to hold on to their DB schemes to avoid having to overhaul their wider pension offering. However, he added that “it won’t give a big incentive”.
At the mercy of markets
Calum Cooper, partner at consultancy Hymans Robertson, said the economic environment remains a major obstacle for DB schemes.
He said: “We’ll see a lot of schemes closing to future accrual because long-term interest rates are very low, so the cost of future service looks much higher.”
Cooper added that this, combined with the end of contracting-out, would be “the straw that breaks the camel’s back".
Roger Mattingly, director at professional trustee company Pan Trustees, concurred, saying the FTSE 250 “must be pretty close to closed to new members already”.
He said it was the “unpredictability” of DB that made it unappealing for many employers, with the challenges created by markets compounded by an ageing population.
“Demographic change has only added to the liabilities," Mattingly said. "It’s a fantastic mechanism but it’s expensive.”
