Future for Defined Benefit Pension schemes uncertain

There is considerable uncertainty concerning the future for Defined Benefit (DB) schemes in the private sector according to The changing landscape for private sector Defined Benefit pension schemes, a research report by the Pensions Policy Institute.

The research shows that DB pensions have been in decline for a number of reasons, including better than expected increases in life expectancy, low investment returns and increased regulation and legislation.

Scheme sponsors are reacting in a number of different ways to the challenges they face: reducing deficits or scheme benefits; changing investment strategies; shifting all, or some, of the risks associated with DB to the scheme members; or, taking the final step and winding-up or selling-on DB pensions. Around two thirds of private sector DB schemes have already been wound up or are closed (or are in the process of closing) to new members. Where there are replacement schemes they are predominantly Defined Contribution (DC) schemes, which can be less generous, place greater risk on the employee and have lower take-up rates.

But it is not yet clear if the one third of private sector DB schemes that are still fully open to new members remain so because the sponsors are committed to continuing DB provision in the future, or because there are other barriers, such as poor funding positions, that are preventing them from closing the schemes.

Chris Curry, PPI Research Director, said “The cost pressures on DB schemes from rising longevity and uncertain investment returns are likely to remain. On an optimistic view, not all schemes are closing, and the rate of scheme closure has slowed in recent years. Some of the pressure could be eased by deregulation, and by greater encouragement for risk sharing between schemes and employees.

On a pessimistic view, the requirement for employers to auto-enrol their employees into existing pension schemes or into Personal Accounts from 2012 could increase cost pressures further, and hasten the switch to DC provision.

The future for DB pensions in the private sector remains uncertain. But it is likely that any future DB pension provision in the private sector will look very different to the provision of the recent past, with fewer schemes and risks shared differently between employers and employees.”