UK
London, 1 September 2010

• Company contributions cut to average of 10% after scheme redesigns
• 33% of companies looking to make changes to DB scheme in near future

Companies making changes to their Defined Benefit (DB) schemes in 2010 are drastically cutting back on their contribution rates as part of the redesign of their pension schemes, according to a new survey issued by Mercer. The survey also indicated that the evolution of ‘traditional’ DB will continue with a third of respondents indicating that they are considering making changes to their DB plans.

Mercer’s Scheme Design Survey analysed responses from 220 multinational companies in the US, UK, Germany, France, Italy and the Benelux countries. The survey was aimed at identifying what types of changes employers were making to their pension scheme design in light of increasing longevity, high pension costs and volatile markets.

Only 14% of the 220 respondents stated that their DB schemes were open to future accrual. Thirty-eight percent stated that their schemes were closed to future accrual and 48% said that their schemes were closed to new entrants. Around 50% of the respondents’ defined benefit plans that were closed to new members did so in years 2002-2005. Around 61% of defined benefit plans that were closed for future accrual did so in 2009 and 2010.

According to Chris Sheppard, head of Mercer’s Scheme Design Group, “This is a story of evolution. The DB plan as we have known it is heading towards extinction but new species are appearing as companies try to adapt and preserve what is a very highly-valued employee benefit and staff retention tool.

“A notable change has been the drop in average size of employer contribution,” he continued. ”This reduces the cost of schemes. However, with employee contribution rates broadly the same, less company contribution has a detrimental impact on an employee’s retirement, so good member communication is vital.”

The survey asked respondents if they had made, were in the process of making, or were thinking about making changes to their DB scheme. The survey showed that where schemes are still open for accrual, the average level of employer future service contributions (excluding expenses and death benefits) was 17% and the average level of employee contributions was 6.3%. Where changes have been made to benefit provision, the average level of employer future service contributions had decreased to an average of 11.3%, while the average level of employee contributions (excluding Additional Voluntary Contributions) had marginally increased to 6.4%. In cases where changes were planned, the average level of employer future service contributions (excluding expenses and risk benefits) were to drop to 10.0%, with the average level of employee contributions (excluding AVCs) proposed to fall to 5.5%. 

Nearly half of respondents (49%) indicated that they had made changes to their defined benefit plan in the last 2 years. The majority of these (52%) had closed their scheme to future accrual. Twenty-five percent had increased their member contributions, while 11% had closed the schemes to new entrants. Other tactics included, reducing pensions increases or revaluations (9%), switching to a career average (CARE) scheme (8%), reducing the accrual rate (8%), increasing the normal retirement age (NRA), capping or limiting increases to pensionable salaries, reducing the level of future pension increases or revaluations to deferred pensions or changing early retirement terms.

Of the 33% that are considering making changes to their defined benefit plan in the near future, 15% indicated that the decision had been finalised; 50% indicating that decision had been provisionally made and 35% still yet to make a decision. The most popular areas being considered are closing the scheme to future accrual (75%) and reducing the accrual rate (12%). Five percent of respondents also noted increasing member contributions, closing the scheme to new entrants, switching to CARE schemes or reducing pension increases.

The rapid pace of change in pension provision continues.  Some companies are finding innovative ways to keep their defined benefit scheme open and resisting closing it to future accrual and this is to be applauded.  There are many ways of reducing risk and cost whilst maintaining the defined benefit scheme much loved by employees and it is good to see that some companies are taking an alternative route to closing the defined benefit scheme fully.

Notes for Editors

Mercer has recently launched a point of view to stimulate “Fresh thinking in retirement plan design”, please follow this link for further information.