Half of DB schemes unsure how to tackle end of contracting out

Contracting out ends in April 2016 as the single-tier state pension comes into effect, increasing the national insurance bill for both employers and employees.

Insurer Axa closed its DB scheme in 2013 having originally cited this cost increase as a key factor behind its decision.

The survey, carried out by consultancy Hymans Robertson, showed half of the 98 respondents had not yet decided how to deal with the change.

A further 15 per cent planned to pay the additional costs and 11 per cent felt 'unable' to make changes.

Jon Hatchett, head of corporate DB at the consultancy, said: “Until very recently we have seen no discernable increase in clients reviewing benefit strategy, compared with say the past five years.

"However, we have seen a spate of enquiries in the past month or two, which is really encouraging.”

Only 10 per cent of schemes said they planned to close their scheme to future accrual.

Experts have previously predicted the change would lead to an increase in the number of DB scheme closures. 

Hymans suggested a five-step process to prepare for the end of contracting out, including assessing the impact on the scheme, consulting with members and communicating any decisions before implementing changes.

The consultancy calculated the cost of NI contributions for a member on an annual salary of £20,000 as £484 from the employer and £199 from the member.

James Patten, head of UK pensions benefit design at consultancy Aon Hewitt, said schemes should expect to spend about nine to 12 months preparing for the changes – but could be nearer 15 months if they decide to close their scheme.

He said: “First thing to consider is how are we going to absorb the cost, [or] do we want to take more significant action?” 

Patten added Aon was working on off-the-shelf communication materials and strategies in anticipation of schemes requiring them when preparing.

A survey last year by Aon found only 25 per cent of respondents were undecided on how to deal with the end of contracting out.

Another 31 per cent planned to absorb the costs and 19 per cent planned to mitigate it. It also found 22 per cent were considering a “more significant benefit cut”.

Patten said it was “understandable” that schemes had not yet looked at contracting out due to the pace and scale of change elsewhere in pensions regulation.

But he added they should give adequate time to consult and inform members around any changes to benefits, as they "will not be overly enamoured with a proposal to increase contributions, for example”.

However, the Hymans survey found only 2 per cent of employers were planning to increase employee contributions.

Ready, but unsure for what

Geoff Tookey, senior manager at consultancy KPMG, said the high level of uncertainty in the survey was not necessarily an indication schemes were underprepared.

He said: “It depends on what they mean by ‘not yet sure’. The majority [of our clients] are definitely thinking about changing, whether they’ve got as far as what they’re going to do is another issue.”

Tookey added many schemes would look at closing their DB offering, as the level of work required for making any change may encourage schemes to review all their options.

“It takes quite a lot of planning and effort to put through DB change. If we’re going to tweak the scheme for the statutory override then we may as well have a wider review… the override doesn’t go far enough for what these companies are trying to achieve.”