New findings from the Pensions and Lifetime Savings Association (PLSA) show the cost of operating a Defined Benefit (DB) scheme is up by 37% year on year.

The findings, from the 42nd PLSA annual survey, also reveal the cost for smaller schemes is even higher, increased by 63% year on year.

Since 2015, the survey found, the mean running cost of DB schemes has increased from £400 to £546 per member.
This has been driven by increases in fund management and custody costs, which are up 32%.

Smaller schemes, those with 5,000 or fewer members, have seen the greatest rise in costs, with an average increase of 63% to £787 per member.

One of the consequences of rising costs, as well as economic volatility and low interest rates, is that fewer schemes are open to new members.

In 2016, 10% of DB schemes were open to new members, compared to 21% in 2015.
Joanne Segars, PLSA chief executive, said: "Higher operating costs, especially for smaller schemes, combined with widening deficit levels, mean DB schemes are under pressure as never before.

"We can't ignore the resulting risk to members' benefits for all but the most strongly funded schemes, and for these members the risk is they will lose 15-20% of their benefits."

Segars said a PLSA DB Taskforce is currently collaborating with the pensions sector to develop recommendations on how changes can be made to the industry to improve outcomes for its members and schemes.

"With more than 6,000 private sector DB schemes in the UK, the Taskforce will explore the potential of scheme consolidation to deliver better value to scheme members and sponsors," she said.

DB schemes continue to grow, fuelled by the success of automatic enrolment.

Master trusts have played a significant role in automatic enrolment and between June 2015 and June 2016, master trusts enrolled an estimated 1.8 million new members.

First published 08.12.2016

Lindsay.sharman@wilmingtonplc.com