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Beginning of the end for DB schemes, says Hymans Robertson

02 September 2016

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The head of corporate consulting at independent consultant Hymans Robertson says Defined Benefit pensions will become a thing of the past.

Citing economic uncertainty as one of the factors, Jon Hatchett said the cost of providing a DB scheme has risen to 50% of pay.

He said: "Post Brexit and the Bank of England's policy response to economic uncertainty caused by the UK's decision to leave the EU, the cost of providing a DB scheme has risen, and this is clearly unsuitable for the majority of employers.

Hatchett believes the last remaining open private sector schemes will close, with a number of high profile employers indicating this is the path they will take.

"Back in March 2015 there were 11m people with a DB scheme, but only 1.75m were still accruing benefits – and since then we've seen a large number of closures," he said.

"Since the new flat rate state pension was introduced in April this year, costs increased for many DB schemes due to the end of a 'contracting out', which was a catalyst for many companies to close their scheme."

"This is only the beginning of the end for open DB schemes."

Looking at the future sustainability of the schemes, Hatchett said he believed the involvement of the Government is a positive thing.

"It's good the Work and Pensions Select Committee is looking at the issue, as the figures involved are gargantuan – either companies are going to have to pay more at the cost of investment, jobs, or salaries; or pensioners are going to lose out."

Hymans Robertson's research among FDs at the beginning of the year supported this idea, with one in seven finance directors (FDs) saying their DB scheme was a major risk to their business.

"Since then, deficits are up by over £250bn or over one third," says Hatchett.

Further analysis by the company showed that post-Brexit, the number of DC savers who will retire on inadequate income has risen from two thirds to three quarters, with many falling back on the state pension, which will also be lower.

"We should not be lulled into a false sense of security with auto-enrolment - while it's been a huge success with low levels of opt-outs, with contributions at 2% of pay it doesn't even come close to securing a decent retirement income," said Hatchett.

"It now takes 50% of pay to fund a decent DB pension at current retirement ages - you don't have to be an actuary to see that this is a car crash waiting to happen."

First published 02.09.2016

Lindsay.sharman@wilmingtonplc.com