Telecoms company EE has closed the defined benefit section of its scheme to future accrual in order to equalise benefits offered to members in a structure which will be more sustainable for the company.
More DB schemes are closing to future accrual after initially closing to new members, with the National Association of Pension Funds' 2013 survey showing 31 per cent had closed to existing staff.
Formerly the T-Mobile (UK) Pension Scheme, the scheme was renamed in July 2011 following a merger between T-Mobile and Orange. The Orange Pension Scheme was transferred into a ringfenced section of this scheme on the same terms and investment options that already existed.
Active members of the EE scheme were automatically transferred into the defined contribution section from July 1 and will receive enhanced terms, meaning the money the company spends on its scheme is distributed more equally across its scheme membership.
A spokesperson for EE said: "We are committed to providing all EE employees with a competitive and fair pension scheme and that is sustainable and affordable for EE over the long term. Following a period of consultation with our employees, the decision was made to close our defined benefits pension scheme for future accrual for existing members."
All pension benefits already accrued will be protected and continue to increase annually in line with inflation. "The changes reflect trends in the wider industry and the UK overall and affects less than 15 per cent of our employees," the spokesperson added.
The £450m DB scheme’s funding level rose to 80 per cent at the end of 2013 from 75 per cent at the same time the previous year, according to the DB section’s most recent newsletter. But the scheme’s funding level was 84 per cent at the time of the previous valuation in 2009.
EE contributed the equivalent of £8.9m a year to the scheme from January 1 2013 over a period of 15 months, and £20m a year from April this year until 2018. The company has also agreed to pay additional contributions if the shortfall at the next valuation, due at December 31 2015, is greater than expected.
Calum Cooper, head of trustee DB at consultancy Hymans Robertson, said factors including increased longevity, an end to contracting-out and low interest rates have created a “perfect storm” for DB schemes that may be considering closing to future accrual.
As well as trying to reduce costs, DB schemes may also consider closing in order to reduce risk, he said, adding a first step is to gain full clarity on the risks they are running.
“Making sure there’s a consistency of where you’re taking risk and where you have conviction, you’ll be rewarded,” he said.
For example, interest rate risk is a concern for many schemes but they do not always believe it is an area of investment that will benefit the scheme, Cooper added.
Employers proposing to close their DB scheme to future accrual must consult members at least 60 days before a final decision is made.
Anne-Marie Winton, partner at law firm Nabarro, said it is not uncommon for employers to offer DB members that are transferred to a DC section enhanced terms as a “sweetener”.
However there is very little employers can use as an enhancement in a money purchase scheme other than offering members an increased employer contribution rate, she said.
To prevent a DB scheme closing to future accrual employers can make changes including raising the minimum retirement age, reducing the accrual rate or increasing the member contribution rate, Winton said.
“There are all these levers and things you can do under the scheme to make it a bit less generous,” said Winton. “[But] the reality is most have done these sorts of changes.”
