Axa has confirmed it will close its UK defined benefit scheme from next month following a review, with current members receiving additional pension payments under the final agreement.
The insurer announced plans to review the £3.3bn DB section of the Axa UK Group Pension Scheme in March, citing higher national insurance costs resulting from the abolition of contracting-out as a factor in its decision.
“Since February we have consulted with members, their representatives and the unions and a number of different options have been evaluated, but we have now taken the decision that the scheme will be closed from September 1 2013,” said a spokesperson.
There are going to be valuations coming along next year and this year, which may not be very pretty
As part of its discussions, the company has 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.
“This will not affect any past benefits and members will move into the defined contribution scheme, which has been offered to all new employees since 2003,” the spokesperson added.
The union Unite represented employees throughout the consultation. It revealed at the end of last month that although 64.8 per cent of the union's members in the scheme were against the sponsor’s additional payments offer, it was not a large enough mandate to consider further action – such as a strike – on the matter.
A spokesperson for the union did not respond in time to comment further.
The impact of contracting-out
The sponsor funnelled more than £600m in contributions into the scheme between 2009 and 2012 in an effort to reduce its growing deficit of more than £1bn.
The government’s decision to end contracting-out at the end of 2016 is likely to have a big impact on the industry.
The change will typically add around 2.5 per cent of the DB members' salaries to employers' national insurance bill, according to consultancy Aon Hewitt.
John Walbaum, partner at Hymans Robertson, said he did not think the Axa closure was likely to be an isolated incident.
“We’re talking about less than three years until [the contracting-out] deadline. There are going to be valuations coming along next year and this year, which may not be very pretty,” he said.
“This is just another reason why finance directors might look to move into this direction.”
Scheme closure might not be the only option for employers facing an increased national insurance bill.
“They can offset that by a number of things," said Walbaum. "One is they can raise members’ contributions, or they could maintain the status quo essentially and just reduce accrual rates.”
