UK Private sector employers are dropping generous defined benefit (DB) pension schemes at an increasing rate, according to new research from the National Association of Pension Funds (NAPF). This domino effect has been replicated in the UK equity market, with at least £25bn having been pulled out of listed companies by DB pension funds over the last year

While unions continue to negotiate with the Government over the lowering of public sector pension promises, it seems private firms are speeding up the rate at which they switch to less generous defined contribution (DC) schemes.

The NAPF's latest annual survey has found that approximately 250,000 savers have been shut out of final salary DB schemes in the past three years. Of these, 23% are now closed to new staff and to contributions from existing members.

Another 30% of schemes that are open to contributions from current members but closed to new joiners, aim to close in the next five years. Only 19% of occupational final salary schemes are still open to new members of staff, says the NAPF.

The results will be of little surprise to many investors who have seen final salary schemes rack up huge deficits over the past decade to the extent that they threaten the long-term existence of the sponsoring company.

NAPF chief executive Joanne Segars said: "The private sector is seeing a seismic shift in its pensions, and more change is certain."

She continued: "People will often find that the replacement pension on offer is a good one. It's encouraging to see that, despite the harsh economic climate, payments into defined contribution pensions by staff and their employers have remained stable."

The survey found that total contributions into DC plans have remained around the 12% mark for five years now. This contrasts with an Office of National Statistics Survey released in the summer which found that DC pots were being built up by an average 9.3% of salary in 2009.

Running for safety

The NAPF survey also demonstrated that UK pension funds have reacted to a turbulent year in equity markets by fleeing from them. It claims only 42% of pension assets are now invested in equities, a drop from 46% in 2010. 

Amongst UK equity holdings this drop is even more marked – down from 17.1% average holdings across funds surveyed in 2010, to 12.2% in 2011. The sheer volume of assets held by pension funds makes that bad news for listed companies.

The finding marries with data held by Pension Funds Online, which shows that average pension fund allocation to UK equities has steadily declined over the last decade from a high of 51% in 2000 to 28.7% by 2010. 

Almost £500bn of assets were represented in the funds that responded to the survey, showing that at least £25bn was pulled out of UK equities by final salary schemes over the last year.

However, it is not necessarily a negative view of their prospects that has inspired pension funds to pull out of equities. The 'de-risking' process that final salary schemes (which are looking to close) typically follow involves automatically dumping equities for more risk-averse assets, such as bonds.

The total proportion of pension funds' portfolios invested in equities outside of the UK, Europe and North America increased from an average 15.3% in 2009 to 21.2% in 2011, according to the survey. This suggests a lack of faith from UK pension funds in these regions' growth prospects in comparison to emerging markets.

First published 15.12.11

dbillingham@wilmington.co.uk