End of road for defined benefit pension plans?

The creation of a new company offering organisations the chance to “divorce their pension schemes” could herald the death knell for final salary (or defined benefit) pensions, industry experts have warned.

Insurance company Paternoster will buy defined benefit scheme liabilities from companies, freeing them from expensive pensions obligations.
Pension Commission figures show the number of defined benefit schemes open to new members has dropped from five million in 1995 to 1.5 million today.

Two insurance companies – Prudential and Legal & General – already offer a similar service, but the creation of Paternoster shows increasing levels of interest in the concept. At least two further companies offering to buy liabilities are in development.

Mark Wood, chief executive of Paternoster, said the corporate defined pension market had historically been overlooked and under-served, and the company would give a “much needed solution” to organisations, trustees and current and future pensioners.

But rather than save defined benefit schemes, Paternoster’s service is more likely to be “the nail in the coffin” of future funds, according to David Robbins, pensions partner at professional services firm Deloitte.

“There is hardly a boardroom in the UK that wouldn’t like to get rid of its obligation to manage schemes,” he said. “If they give their defined benefit schemes to a company like Paternoster, any new scheme they offer will almost certainly be defined contribution in nature.”

Wood, previously head of Prudential’s UK insurance operation, agreed this could well be the case. He added that more and more companies would consider transferring their liabilities so they could not be forced to pay into the Pension Protection Fund levy.

Paternoster aims to get Financial Services Authority accreditation by the autumn, and then it can begin buying pension funds. The company has already secured £500m of capital from a consortium led by Deutsche Bank.

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