UK Pension Update: Record Fund Closures, More Contributions

The death knell for defined benefit pensions has long been tolling in the UK, and now it looks as if the chimes are speeding up.

(January 28, 2013) — Defined benefit pension funds closed at a record rate in the UK’s private sector last year, as employer contributions rose and capital was allocated to less “risky” assets, the country’s industry body has announced.

The percentage of close DB funds that were closed to new members in the UK rose to 87% last year, the National Association of Pension Funds (NAPF) said in its annual report today. This is a rapid increase from 81% in 2011 and 79% in 2010, the organisation said.

For those funds still open to new members, over half reported to the NAPF that they were considering changes in the next few years to try and ease the pension burden, including 46% considering closing funds to future accrual. Already, the percentage of funds close for future accrual grew from 7% in 2010 to 31% last year, the NAPF said.

Joanne Segars, NAPF CEO, said: “The pressures on final salary pensions have proven too great for many businesses. The growing liabilities fuelled by quantitative easing will have been a factor behind the record hike in closures.”

Moves by the Bank of England to help stimulate the economy through quantitative easing, have pushed down government-issued bond yields, which has forced up many schemes’ liabilities. The Bank of England admitted its actions had inflicted pain on the industry in a report issued last summer.

Malcolm McLean, consultant at investment advisory firm Barnett Waddingham, said: “This is further depressing evidence about the decline of final salary schemes in the private sector. It is apparent that many more will find themselves on the slippery slope to oblivion if employers cannot be persuaded to find other ways to keep them open.”

One way to help ease the pain of poorer funding levels – this dropped from an average 95% on an IAS19 basis in 2009 to 93% last year – was to extend recovery periods. The NAPF noted that the average recovery period had extended from seven years in 2009 to up to 9.5 years in 2012.

Those in charge of pension funds addressed the risk they posed to an employer – and vice versa – last year, with an increased number enquiring about strategies including buyout, longevity hedging and contingent asset guarantees. However, only a fifth of schemes had so far implemented any kind of such strategy, the NAPF said.

Asset allocation among UK pension funds has continued to follow the global trend away from equity investment, with the average allocation falling seven percentage points from 42% in 2011 to 35% last year. Domestic equities took the largest hit in this regard.

Corporate bonds and other non-sovereign-backed vehicles picked up assets in 2012, with an increase from 13% in 2011 to 19% last year, the NAPF said.

Segars concluded: “While many have closed their doors, private sector final salary pensions are far from finished. More than two million workers are still saving into one and they pay the pensions of over four million pensioners. It is essential that the government shows them more support in managing some extremely testing economic circumstances.”

For an in-depth interview with Joanne Segars, CEO of NAPF, see the January/February edition of aiCIO – out next month.