Eighty per cent of defined benefit pension schemes now closed to new entrants

12 July 2007
Four out of five defined benefit pension schemes are closed to new entrants, according to research by the Association of Consulting Actuaries (ACA),

A defined benefit pension scheme is one where the benefits payable to the members are determined by the scheme rules. In most cases there will be a compulsory employee contribution, normally about 5% of salary, but over and above this, all costs of meeting the quoted benefits are the responsibility of the employer.

The ACA survey, which collected responses from 330 employers with scheme assets exceeding £127 billion and over 2.1 million members, found that two years ago, 68% of defined benefit schemes were closed new entrants, the figure has now risen to 81%. There is also a four per cent increase – up to 14% - of schemes that are now closed to future accruals.

The survey also found that the cost of running such schemes is rising - over the last five years, the average employer contribution has nearly doubled from 11.5% to 22.6% of earning and member contributions have also increased, on average by 40%, from 4.3% of earnings to 6.1%.

But, the research showed that these increased contributions were not just addressing deficits - two-thirds of employers have increased contributions in order to also meet future service benefits, but eight out of ten defined benefit schemes remain in deficit.

Commenting on the survey report, ACA Chairman, Ian Farr said: "The big downside of the scheme closures that have taken place as private sector employers have de-risked for the future is that we are facing the very real prospect of growing ‘under pensioning’ in respect of millions, particularly the young and middle aged.

“The Government must act quickly to encourage pension provision that is better than a minimum level through personal accounts,” he said.

Mr Farr says that unless something is done, more pensioners “will need to rely on means-tested State benefits in the future than is currently predicted” and says the consequent risk of this is that “future taxpayers may find the call placed on them unsustainable alongside the other public expenditure needs of the day.”

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