Shift to DC Plans Increasingly Common in UK

November 12, 2004 ( - More United Kingdom defined benefit (DB) pension plans are closing to new employees, a trend that signals an increasing reliance on defined contribution (DC) plans in the British Isles.

Almost half (47%) of British DB plans are now closed, up from 42% in 2003, according to a study by Greenwich Associates. About 98% of UK pension assets are still in DB plans. In ten years, UK plan sponsors expect to still hold 85% of assets in DB plans, according to the report.

With increasing number of employees set to retire, plan sponsors are increasingly focusing on plan solvency, Greenwich Associates said. With assets under management still below the levels they were at in 2000, this is becoming an even more important consideration for cash-strapped plan sponsors. Although solvency is high (99%) for larger funds (those over two billion pounds), smaller plans are having a hard time with funding levels. Thirty-four percent of UK corporate funds are less than 90% funded, and, despite strong equity markets in 2003, a quarter of UK pension plans are only funded at 85% of expected benefit payouts.

Asset allocation in UK pension funds is also changing, with equity holdings falling from 73% in 1999 to 63% in 2003, the report said. Fixed-interest holding rose 9% during this period, up to 28% from 19%.

Twelve percent of UK pension managers plan to alter their allocation to hedge funds in the next 12 months, with almost all changes amounting to increased investment in these esoteric investment vehicles. However, the amount of UK pension fund money invested in hedge funds is still small, representing only 0.2% of assets under management, according to Greenwich Associates.

Greenwich Associates ( ) is an international research-based consulting firm in institutional finance.