'Fresh wave' of DB scheme closures predicted in 2021

The market events of 2020, combined with trends seen over recent years, could lead to a wave of benefit reviews by UK companies and subsequent pension scheme closures in 2021, Aon has warned.

The prediction follows the firm's annual Pension Benefits Design Survey, which found that an increasing number of companies are reviewing their UK defined benefit (DB) schemes.

It revealed that over two-thirds (68 per cent) of schemes are now closed to future accrual, 8 per cent more than in 2019, whilst 94 per cent of private sector DB schemes are already closed to new entrants.

Aon benefits design team head, Dave Hughes, also stated that the survey has shown a "clear link" between previous financial turmoil and benefit review activity, with an increase in review activity therefore expected in the new year.

He continued: “It's no surprise that the trend towards DB closure has continued, but, with our survey showing the trend up to March 2020, the key question now is how the market will respond to the Covid-19 pandemic.

"We are already working with a number of clients to explore what is right for them and their DB schemes.

“With a difficult economic outlook ahead, it is difficult to imagine that next year will not see finance directors taking a close look at what will often be the eye-watering cost of DB benefits.

“If you do still have an open DB scheme and aren’t planning to review it now, when would you, if ever?”

However, the survey also found that 84 per cent of DB closures to accrual in the last four years saw employers go beyond the statutory minimum requirements in communicating with employees.

Furthermore, 74 per cent offered some form of concession to members compared with the initial proposal, increasing to 90 per cent where unions were involved.

Commenting on these findings, Hughes added: “When closing a DB scheme to accrual, it's important to guide members through the process – they need to understand why a change is being proposed, what it may mean for them and what they can do to get the best outcome in the future.

“To support this, personal illustrations, townhall meetings, FAQ documents and one-to-one meetings are becoming common.

“Of course, providing communications support in the current climate brings its own challenges. For those normally based in office environments, we expect to see clients adapt to communicating these difficult messages via video conferencing.

“But, for example, in manufacturing environments, the approach of holding townhall meetings may no longer work and alternative methods may need to be considered.

“Similarly, the role and influence of unions in these exercises should not be underestimated. Our survey shows that union involvement does have an impact on the level of concessions offered to members.

“As a result, where unions are involved it is even more important for organisations to think through potential member views ahead of time and as part of a broader DB closure strategy.”

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