TPR data reveals 'terminal decline' of private sector DB schemes

The number of active members in private sector defined benefit (DB) and hybrid pension schemes has fallen 62.6 per cent in the past decade, with only 9 per cent of schemes still open to new members, according to new data from The Pensions Regulator (TPR).

TPR's Annual report on UK defined benefit and hybrid schemes 2022 revealed that there were 785,744 active private sector DB and hybrid scheme memberships in the UK as of March 2022, representing a 13.6 per cent year-on-year fall.

The report also revealed that only 9 per cent of private sector DB schemes remain open to new members, with 37 per cent closed to new members, while a further 50 per cent were closed to future accrual, and the remaining 4 per cent were winding up.

The majority (44 per cent) of memberships were from schemes that were closed to new members, while 34 per cent were from schemes that are closed to future accrual, although 21 per cent of memberships were from open schemes.

Evelyn Partners financial planning director, Gary Smith, argued that final salary pensions are in "terminal decline in the private sector", highlighting the report as demonstration of the "private-public sector divide in pension provision".

Indeed, TPR's figures revealed a very different picture for the public sector, as the report revealed that there were around 6.83 million active members in public sector DB schemes in 2021/22, down from 7.48million in 2020/21.

LCP partner and head of research, David Everett, also noted that the "position is far rosier in the public sector", arguing that while private sector DB provision is increasingly a legacy issue, the future does not have to be entirely defined contribution (DC).

"It is now more important than ever that the government comes forward with its proposals on how it will expand the collective DC (CDC) regulatory environment.”

The report also revealed an improved funding position across the DB landscape, although Isio director, Ian Cochrane, noted that these figures only run to 31 March 2022, with a rapid acceleration of BD scheme maturity seen amid recent market volatility.

"Many DB pension schemes have ended up much closer to being able to fully insure their liabilities, a target that before may have been considered unachievable in the short term," Cochrane continued.

“For sponsors, this can present a dilemma. They would like to take the opportunity to remove the pension scheme from the balance sheet for good, but do not want to risk overfunding the scheme by closing the gap too quickly and finding insurer pricing has moved favourably.

"In many cases a surplus in a scheme cannot be returned to the sponsor and even if it can be it comes with a 35 per cent tax charge.

“Therefore, we are seeing a renewed interest in escrow arrangements, where the sponsor puts cash aside for the scheme so that amounts not needed for buy-out can easily be returned."

Cochrane also suggested that this trend could accelerate further in 2023 as sponsors and trustees prepare for the path to buyout.

“While the concept is straightforward, the implementation can be complicated by differing views of how the escrow should or could be structured," he added.

"Early engagement with the escrow bank or escrow agent is critical and we hope to see more consistency in the approach to agreeing the appropriate structure.”

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