Large employers at DB tipping point

One in five defined benefit schemes had closed to future accrual by March 2009.

The book, an analysis of 6885 schemes by the Pension Protection Fund and The Pensions Regulator, showed mostly small pension schemes had closed to existing members before 2009.

However, consultant Towers Watson said last year could mark a tipping point and more large employers will close their DB plans in 2010.

Senior consultant Mark Duke said: "The recession made some companies bite the bullet, and the question now is how much difference an economic recovery will make.

"Last summer, employers told us that half of DB schemes would be closed to existing members within three years. After being badly stung by widening deficits, it will take more than a few green shoots to persuade employers that they want to keep taking on new pension risks and some will go ahead with plan closure come what may."

However, he added: "But others could turn back from the brink to avoid losing experienced staff if the job market improves."

Even without further closures to future accrual, staff turnover will mean that the number of employees building up new DB pension entitlements steadily declines.

By March 2009, only 2.6 million out of the 12.4 million members of DB schemes (excluding those for government employees) were still accruing new benefits - the rest were either pensioners or deferred members with preserved pension entitlements.

Duke said: "Defined benefit schemes are now much more about former employees than present employees. As more schemes close to accrual, companies will increasingly focus on the endgame of securing benefits for a known cost.

"For current employees, the name of the game is to help them understand the risks they are shouldering through defined contribution pension savings and to take a more hands-on approach to planning for retirement."

Pension Corporation partner Amarendra Swarup said the Purple Book results reflected the "huge impact of the credit crunch" and recession on DB schemes.

He said: "The outlook for the future is still far from rosy. Deflationary pressures from the deleveraging under way in the real economy are yet to fully subside while the vast amounts of fiscal stimuli and quantitative easing increase worries over future inflation and the state of government finances.

"Alongside the consequences of the current crisis, society also has to prepare for the economic and fiscal consequences of population ageing, married to the retirement of the baby boomers. The crisis in pensions is far from over."

Swarup added: "The bleak outlook should not only be seen as a challenge but also as an opportunity to create a more efficient and equitable pensions landscape for the future. A national debate on the future of pension provision in the UK is long overdue."

Purple Book data also showed the number of schemes putting contingent assets in place jumped by 30% to 587 in the year to April 2009.

It showed contingent asset arrangements put in place for the 2009/10 levy year cut PPF levies by a total of £100m.

It also showed schemes made about £26.5bn of deficit reduction payments by April 7 this year.

The book also revealed the extent of the volatility in financial markets, with the average monthly funding position varying by about £375bn - from a surplus of £173.4bn to a deficit of £200.6bn.

It said there had been a "marked rise" in the long-term risk to the PPF between March 2008 and June 2009 - saying the escalation was the result of deteriorating scheme funding, a worsening economic outlook, and rising sponsor insolvency probabilities.

PPF chief executive Alan Rubenstein said: "This year's Purple Book highlights how the dramatic deterioration in the economic and financial environment during 2008/09 led to heightened risk for the schemes in the PPF universe."

TPR chief executive Tony Hobman added: "While there has since been an upturn in the financial markets, we remain alive to the risks and continue to work with schemes on their recovery plans."

The research also found schemes had seen equity allocations fall from 50.2% in April 2008 to 46.6% in April 2009. Fixed income allocations rose from 26.5% to 29.2%; cash and deposit holdings increased from 4.4% to 5.6% and property investments fell from 2.9% to 2.8%.