Final salary pension schemes drop to record low

The number of final salary schemes open to new members has dropped from a quarter last year to a record low, with barely a sixth (17 per cent) still open to new members, according to new research released today by Aon Consulting, a leading pension, benefits and HR consulting firm. Yet because of their near extinction, final salary schemes have become a prized asset in the fight to retain employees.

Aonís 2008 Employer Survey found that a combination of factors have created tough conditions for companies to continue with defined benefit (DB) pension schemes. These include tighter regulation of pension schemes, volatile market conditions, strengthening of longevity assumptions and fears over future developments in accounting for pensions. There is clear evidence of an increasingly restrictive environment for DB schemes: in the corresponding Survey last year, approximately a quarter (28 per cent) were still open to new members, down from half in 2003.

The 2008 Employer Survey found that over three quarters (81 per cent) are continuing to allow further pension accrual. Employers said the chief reason for doing this was competitive pressure related to employee retention, which has overtaken board resistance as the number one reason to maintain further DB accrual.

A third of employers (32 per cent) continuing to offer DB schemes to new entrants said that closure was ëtoo painfulí to contemplate. This was significantly more than last yearís figure of 17 per cent, and this is partly explained by several high profile closures to future accrual during the course of last year.

Commenting on the findings, June Grant, principal, at Aon Consulting, said: ìWith the number of final salary schemes plunging to a record low, they have now become gold dust for the employees who still have them. Employers can turn this to their advantage because the schemes give them a competitive edge in the fight to attract and retain talent

ìWhile regulation, improved life expectancy and market volatility have all served to increase pressures on employers sponsoring DB pension schemes, good scheme design can play a vital role in mitigating their effects.

ìFinancial innovation over recent years has helped scheme sponsors to reduce volatility, but the only way to reduce the real level of cost is by reducing the benefits offered. Options to achieve this include increasing the schemeís normal retirement age, reducing the rate of benefit accrual and increasing membersí contributions.

ìApart from adapting to legislative change, the fundamental design of most DB schemes has changed little over the decades since they were first introduced. Most scheme sponsors would benefit from reviewing their scheme design from a more radical perspective, and one that both supports corporate strategy and addresses employee resistance to change.î