Pension study shows decline in defined benefit plans

One in eight defined-benefit pension schemes are now closed to new members, up from one in 10 last year, according to a survey of occupational pension schemes published yesterday. Up to a quarter of schemes could have closed by next year, the survey found.

The findings are based on research by the Pension Fund Partnership, which interviewed people running 118 pension schemes in Ireland, representing almost 400,000 employees.

A defined-benefit pension scheme guarantees employees a percentage of their final salary, usually between one-half and two-thirds. But more and more companies are now only offering defined-contribution pension schemes.

Under defined-contribution schemes, the size of the pension depends on how much is contributed to the fund, which is then exposed to variations in the stock market.

The research shows that employers will contribute almost twice as much to defined-benefit schemes as they will to defined-contribution schemes. Under a defined contribution pension, the employee will shoulder most of the risk.

"It's what is in the pot at the time. If the money has not been put in and the markets are suffering, then there could be a nasty shock in store," said Mr Kevin Sims, partner at the Pension Fund Partnership - a UK based pensions research company.

Some 86 per cent of defined benefit schemes are more than 11 years old, while 85 per cent of defined contribution schemes were established in the last 10 years.

Market slumps, the introduction of the FRS 17 accounting standard and increased longevity have all prompted companies to review their pension provisions.

Over a quarter of respondents to the survey by the Pension Fund Partnership said they were likely or very likely to close their defined-benefit pension scheme to new members in the next year.

However, Mr John Feely, chairman of the Irish Association of Pension Funds (IAPF), said he would be astonished if anything like this figure closed their schemes. "Clearly there will be people looking at it, but you don't change pension schemes overnight," he said. "It is a detailed and rigorous process."

The IAPF's most recent survey of its members, published in June, estimated that 7 per cent of companies had closed defined-benefit schemes to new members over the last three years.

But Mr Feely was not surprised by the finding that over half of respondents to the Pension Fund Partnership's survey mentioned complex legislation as one of the main challenges they face.

The risk of investment underperformance and market volatility were the top two current concerns, but when asked what one thing in the pensions industry the respondents would change, the area most frequently mentioned was reducing or simplifying pensions legislation and its complexity.

Mr Feely said the IAPF was fully in agreement with new legislation on pensions, including the introduction of personal Retirement Savings Accounts (PRSAs). But the new legislation had been introduced on top of existing legislation, making it "extremely complex" for fund managers.