PPI predicts bleak future for Defined Benefit pension schemes

08 October 2007
A new report from the Pensions Policy Institute (PPI) on 'The changing landscape for private sector Defined Benefit pension schemes' has cast a shadow over the future of Defined Benefit (DB) pensions.

PPI’s research reveals that there are several contributing factors to the decline in DB pensions, including higher increases in life expectancy than previously anticipated, low investment returns and new legislation.

And research director, Chris Curry, said that: “The cost pressures on DB schemes from rising longevity and uncertain investment returns are likely to remain.”

As a result, reduced deficits and scheme benefits have been introduced and there have also been changes to investment strategies. This has led to some, or all, of the risks associated with the schemes being translated to scheme members.

The report indicates that approximately two-thirds of DB schemes have already been, or are in the process of being, closed to new members. Meanwhile, Defined Contribution (DC) schemes – which can leave scheme members at greater risk, and are often less generous – are increasingly replacing the schemes.

“On an optimistic view, not all schemes are closing, and the rate of scheme closure has slowed in recent years,” said Mr Curry.

He added: “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.”

There is some confusion over whether the remaining private sector DB schemes that are still open to new members will continue to be available because sponsors are committed to continuing DB provision in the future, or because there are reasons preventing them from closing the schemes.

“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,” said Mr Curry.

Find out more about retirement planning and pension annuities