DB closure could increase liabilities

Defined benefit planEmployers should consider what alternatives to closure exist when deciding how to reduce their defined benefit (DB) pension plan deficits, says Aon Hewitt, a pensions consultancy.

If they do not do this, employers may risk running larger deficits than otherwise necessary.

The announcement comes at a time where DB pension schemes are increasingly opting to close to further accrual, with Aon Hewitt’s recent Global Pension Risk Survey finding that 29% of UK respondents had frozen their schemes.

James Patten, benefits design specialist at Aon Hewitt, said:

"Many employers looking to deal with DB pension deficits will naturally feel freezing the scheme must lead to the greatest savings. With so many companies having done this to date, who would blame a cash-strapped employer for thinking that the best way to deal with a large pension deficit must be to turn the DB tap off?”

Aon Hewitt cites other potential ways to tackle a DB pension deficit, including a career average arrangement or a cash balance design.

Capping pensionable pay growth in a final salary scheme is another possibility, with a cap of 1% pa often leading to deficit savings 80% higher than what could be achieved by closing a DB plan. It can additionally help to control risk where the scheme has a mature active membership.

However, freezing a DB scheme is recognised as the most suitable course of action for some, particularly where the active membership is less mature and the employer is looking to control the build-up of risk.

Patten added: “This is a classic case of where we are discovering the best ways to tackle an issue as the market gains in experience. Employers need to think about their own circumstances individually and judge the approach to take that way. There may be other benefits too - low cost DB alternatives can be more palatable to members than just freezing the DB scheme."

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