UK - Cash-strapped employers intent on closing their defined benefit schemes entirely should rethink their plans as alternative strategies could save them money, Aon Hewitt says.
The consultant said closing the scheme to future accrual or freezing can leave sponsors to deal with a massive deficit.
It urged employers to consider other options, such as maintaining the scheme with a cap on pensionable pay growth.
Aon Hewitt said its recent Global Pension Risk Survey found 29% of UK schemes were already frozen to future accrual, and momentum in the market meant frozen schemes were seen as the default option of dealing with spiralling deficits.
Aon Hewitt benefit design specialist James Patten said: “With so many companies having done this to date, who would blame a cash-strapped employer for thinking the best way to deal with a large pension deficit must be to turn the DB tap off?
“However, there are alternatives that may be more beneficial. For example, maintaining the DB arrangement but with pensionable pay growth capped at, say, 1% per annum, can often lead to deficit savings more than 80% higher than those gained from DB closure.”
He added that switching to a career average arrangement or cash balance design was also worth considering.
Patten explained that capping pensionable pay growth can be more suitable for schemes looking to control risk where the fund has a mature active membership.
“There may be other benefits too low cost DB alternatives can be more palatable to members than just freezing the DB scheme.”
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