Aon Hewitt: Closure to DB Accrual Among Schemes Gains Momentum

(November 3, 2011) — A study by consulting firm Aon Hewitt has confirmed a continued trend of closure to defined-benefit (DB) accrual among UK schemes. 

Just over 300 of Aon Hewitt’s clients with DB arrangements, predominantly in the private sector and across a broad range of industries, were surveyed in the firm’s Pension Benefit Design report.

“Just over 40% of the schemes surveyed have either already closed to DB accrual or are currently in the process of closing to future accrual,” James Patten, benefits design specialist at Aon Hewitt, said in a statement. “Nearly half of those that have closed to accrual, and indeed many of those that have not, are now taking pension risk management to the next phase. In some cases, this might simply be through implementing a liability management exercise such as an enhanced transfer value offer.”

Patten continued: “However, in an increasingly uncertain economic environment, we are seeing more schemes trying to take this concept a stage further. A growing minority is considering, or indeed implementing, ‘flight plan’ strategies to chart a course for reducing pension risk exposure at appropriate times, and/or ultimately fully settling their liabilities with an insurance company.”

Furthermore, the survey demonstrated growing evidence of some variation by industry. DB closures proved to be most common in technology/IT, telecommunications, professional services and construction.

Patten concluded: “In view of recent market volatility, and further pension cost pressures from auto-enrolment, it will be interesting to see whether organisations in sectors which have so far seen fewer DB closures, such as chemicals and pharmaceuticals, energy and oil, or transport and haulage, will look to follow suit in the years to come.”

The closure to DB accrual represents a greater focus on risk managements strategies among schemes. Mark Hyde Harrison, the new Chairman of the National Association of Pension Funds (NAPF), noted last month that defined contribution (DC) pensions in the UK are inefficient and wasteful. In the UK, DC pensions have largely replaced final salary, or defined-benefit (DB), pensions in the private sector. According to the NAPF, their importance is set to balloon ahead of new government rules that will force all workers to automatically enroll into the system.