A growing number of UK companies are now closing schemes to future accrual for existing employees as well as looking to buyout their pension schemes, according to the third PricewaterhouseCoopers Pensions Survey.

The survey, which tracks the opinions of pension decision makers in 86 UK organisations, found a disconnect between the clear exodus from defined benefit (DB) provision and the increasing importance of pensions in attracting and keeping the people organisations need to succeed - raising big questions about the future of pensions provision.

Marc Hommel, a partner at PricewaterhouseCoopers, said that pensions play a critical role in attracting and keeping the top-performing individuals despite the clear exodus from defined benefit provision.

“There has been a mass transfer of risk from employers to employees in relation to retirement savings. It is time for companies to step up and help their employees navigate the consequences of this sea change,” he added.

Closure of schemes to future pension accrual

Sixteen per cent of participants have now closed their DB scheme to future accrual for existing employees and another 11 per cent expect to do so in the future.

This finding is significant in light of the fact that a year ago all of the respondents’ schemes were still providing accrual to existing members, while six months ago just 3 per cent had ceased to do so.

In the last six months, the number of schemes closing to existing employees has risen by some 13 percentage points.

In addition, the closure of DB schemes to new employees continues to gather pace - with just one in five (20 per cent) respondents’ DB pension schemes open to new members, compared with one in three (33 per cent) last year.

Hommel said that it was no surprise that companies continued to close their defined benefit schemes to new employees, but pointed out that the trend towards ceasing to provide future accrual of benefits to existing employees showed just how far UK companies were prepared to go to address their exposures to defined benefit pension provision.

Interestingly, 88 per cent of respondents report that pensions are equally or more important than three years ago in attracting, retaining and motivating employees.

Pension scheme buyouts

The findings also show over a third (35 per cent) of companies are looking to buyout some or all their pension liabilities. This figure reflects an eight percentage point increase from the 27 per cent reported in summer 2007.

One in five (19 per cent) respondents is looking to do so in the next five years compared with one in ten (11 per cent) last year.

The data suggests larger companies (i.e. those with more than 5,000 employees) are more likely to take this kind of action – 43 per cent are considering buyout in future, with 27 per cent indicating they wish to achieve this within the next five years.

Commenting on the correlation between the perceived burden of the pension scheme on the sponsoring company’s finances and interest in buying out, Hommel said there was increasing concern from companies about the volatility of their funding position and the associated impact on their balance sheet and profit and loss.

He added that this was particularly true of companies where the scheme liabilities are comparable to the value of the organisation.

News of recently announced buyout transactions, together with growing opportunities to gain economically justifiable terms, is making pension buyouts an increasingly palatable option for companies with defined benefit pension schemes. 

Hommel warned that companies need to give careful consideration to the needs of all stakeholders, including shareholders, pension trustees and scheme members.

“Buying out is a complex process - there is no ‘one size fits all’ solution, but increasing imagination and flexibility in the pensions industry are creating opportunities of mutual benefit,” he noted.

Opportunity unlikely to last long 

Hommel believes that many of the existing buyout providers are going to need to raise further capital if they are to write more business to meet growing demand.

He said that it was not certain that investors being asked to provide that capital would be satisfied with the returns available if current pricing policies continue, which is why he pointed out that the opportunity to buyout liabilities on relatively attractive terms is unlikely to last long.

Of companies where the pension scheme liability exceeds the sponsoring organisation’s value, three quarters (75 per cent) are considering buying out.

Some 44 per cent of respondents are not prepared to pay more than the value of liabilities reported in the company’s accounts to facilitate a buyout. Fewer than 10 per cent of respondents would pay more than 120 per cent.

Related articles

• Pension funds look towards settlement
• Firms outsource with-profits actuary
• Longer lives costs pensions £40bn
• FTSE 100 firms offload pension risk
• CIMA warns on pension risk
• Interest in pension buyouts doubles
• The cost of living longer
• Mortality triggers could be misleading
• Half the FTSE100 changed pension mortality assumptions
• Key role for finance directors in pension reform
• Six in ten firms look to offset longevity risk
• Actuaries call for support action on pension transfer values

Related links

• PricewaterhouseCoopers