More schemes offering member concessions on DB closure

Providing defined benefits is costly, and over the years many companies have closed their DB pension funds, shifting risk onto employees through defined contribution schemes.

But for some, doing so has been seen as too challenging – often due to the level of pushback from unions and employees.

Some are taking the view that future benefits is a matter for the employer to decide, and less of something for the trustees to be involved with

Dave Hughes, Aon

However, according to Aon’s latest Pension Benefit Design Survey, benefit reviews are now starting to be carried out for many DB schemes previously thought of as too difficult to close.

The survey of 317 DB schemes, ranging in size from under £20m to over £40bn, showed that since 2014 105 schemes have carried out benefit reviews.

Sixty per cent are now closed to DB accrual, up from 48 per cent in 2014, and with a further 21 per cent reducing future accrual in some way.

More closures involve concessions

Forty-eight per cent of the reviews in the consultancy’s survey have had union involvement.

“The [schemes] that have remained open for longer are probably the ones that are more unionised, so as a function of where we are in the run-off, if you like, you’re more likely to get union involvement,” said Dave Hughes, head of Aon’s benefit design team.

This is likely to be responsible for the growing trend of offering member concessions, according to Mr Hughes.

The survey found that 59 per cent of benefit reviews in the last few years have involved some kind of concession to members compared to the initial proposal – up from 35 per cent for benefit reviews before 2014.

Fifty-five per cent of schemes offered enhanced levels of DC contributions as a concession, while half of the schemes surveyed offered maintained ill-health, early retirement or redundancy terms for members.

Last year Pensions Expert reported on the General Medical Council’s consultation on the closure of its DB scheme and the implementation of an enhanced version of the existing DC scheme for all staff.

David Brooks, technical director at Broadstone, said that “employers will have to consult with members and unions when making changes to the rules such as this”.

He added that having organised union representatives can “make an effective intervention in replacement benefits, including increasing future contributions from the employer to a DC scheme and often improving transitional plans as the scheme is closed and the DC scheme opened”.

Increased emphasis on protection of accrued benefits

If trustees are faced with a company proposal to close the DB scheme, their approach will depend on the power they have in the rules, according to Mr Brooks.

“If their consent or agreement is required there are some onerous requirements on them to act in the best interests of the scheme members,” he said.

The trustees would, therefore, have to consider all the relevant factors behind the closure.This will include a proper analysis of the amendments powers to ensure any benefit protections exist, as well as the business case for the closure.

“This may also include actuarial confirmation that the changes will not adversely affect rights earned up to the closure,” Mr Brooks said.

However, the mere fact that DB closures are now so common can help wear trustees down on consenting to closure. 

“The greater precedent on closures out in the market… and the shift in populations over the years from more actives to more deferreds and pensioners," has contributed to this, Mr Hughes said, adding that trustees now place "a greater emphasis being placed on the security of benefits”.

“Some are taking the view that future benefits is a matter for the employer to decide, increasingly, and less of something for the trustees to be involved with,” he continued.