New research from Hewitt Associates, a global human resources consulting and outsourcing company, has shown that nearly 20% of the 154 UK pension plans surveyed had now closed to Defined Benefit (DB) accrual, with a potential doubling of that figure expected over the next year.
Jackie Daldorph, managing principal at Hewitt, said: “The vast majority of pension schemes have now closed to new entrants, but the pace of closure to existing members is accelerating, with the number of “frozen plans” expected to double in the next 12 months. For companies now embarking on a plan freeze, the issue becomes how to do so, while still keeping the members, their unions, and trustee boards onside.”
Other Changes Contemplated
Though freezing plans by closing them to future accrual of defined benefits is one way to change benefits, Hewitt notes that other means being considered by companies in their survey included retaining a final salary scheme but capping growth in pensionable pay, or moving to a career average (CARE) scheme. Hewitt said that, for most organizations, the process of changing benefits typically involves having a clear understanding of the wider business objectives – and constraints – and then determining a design that best meets these, followed by consultation with trustees, members and unions on the changes.
Where more significant benefit changes are being proposed, such as freezing the plan, it is particularly important for the employer to have a well-planned strategy in place which is then backed up by effective execution. Hewitt said that perspective was emphasised by the Department for Work and Pensions in its recently issued guidance on conducting benefit reviews.
However, Hewitt advised that schemes should proceed with caution and avoid the temptation to try to short-cut the process. Tony Baily, principal consultant at Hewitt, said: “There are often good reasons for freezing plans. However, the recent wave of plan freezes potentially puts pressure on other companies simply to follow suit – without really understanding whether this best meets their business objectives and constraints.
“For some companies the driving factor to freeze is to achieve equality of terms between DB and Defined Contribution (DC) members; for others it might be one of risk management. Whatever the reason, it is important to have a solid business case to help the workforce or trustee board understand the reasons for change.”
Hewitt surveyed 154 pension schemes during January 2010, across a mix of their client base. The 154 schemes were sponsored by 143 employers, the large majority of which were based in the private sector, according to the consultancy.