UK - Companies which close defined benefit schemes to new members could see contribution levels soar to 100%, an actuarial consultant warns.
Lane Clark & Peacock says these companies will have to increase their contribution rates continually because there will be no new members to pay for existing members’ pensions.
Partner Alex Waite said: “There is a tendency among companies to think: ‘Right, we don’t need to think about this any more, the scheme is closed’.
“But if they haven’t got any new people going in, they have still got people earning benefits and they’ve still got a huge investment risk there.
“Normally, firms pay contributions as a percentage of payroll. If the payroll is diminishing, they can actually find that they’re going to be putting in 100% of payroll in employer contributions, which is a shock when it comes along.”
Hymans Robertson head of actuarial practice Ross Russell agreed.
“Most pension schemes are funded on the basis that they are going to remain open.
“But when a scheme is closed, there are no new members to keep the age profile down, so company contribution rates will start to rise as the scheme matures,” he said.
One City analyst urged companies contemplating closing their schemes to put more money into them and follow Boots’ lead by radically overhauling their scheme’s asset allocation.
The analyst said: “Closing a scheme to new members doesn’t get you very far because the change is so long-term.
“You still have people aged 30-50. What you’ve actually done seems hardly worth the gamble.”
The top stories this week were the High Court's decision to block the £12bn annuity transfer from Prudential to Rothesay Life, and a separate court ruling that 'raises the bar' for pension rectification exercises.
Guaranteed minimum pension (GMP) equalisation has soared to the top of pension schemes' to-do lists, with 58% stating it is a priority project, research from Equiniti has revealed.
Professional Pensions is holding its defined contribution (DC) conference on 4 September.