Rising costs may force closure of existing pension schemes

More
employers will be tempted to close their final salary schemes to existing
members as well as new members to curb increasing costs of pension provision.

This
is the conclusion of a study by Mercer Human Resource Consulting, which finds
that costs for a typical final salary scheme, which has been closed to new
members, are expected to rise by 25 per cent over the next five years.

This
contrasts with an increase of 30 per cent for final salary schemes which remain
open to staff.

"Employers
everywhere still need to bite the bullet and take some hard decisions on
cutting their pension costs," said Peter Bowers, European partner at
Mercer.

"The
majority of companies have already closed their final salary schemes to new
members, but this was the easy step. The next big issue is how to deal with the
current membership."

Mercer
predicts there will be a new wave of pension reviews, where final salary
schemes are either adapted to reduce employer risks or closed to existing
members.

"Closing
a scheme to new entrants is a relatively easy decision to take. But employers
are fooling themselves if they think this alone will solve the problem of
rising pension costs and increasing risks," said Mr Bowers. "Unless
companies have a particularly high staff turnover, such a decision will not
significantly reduce their long-term pension liabilities."

"With
recent turmoil on the stock market, pension fund assets are shrinking. At the
same time, with longer life expectancy, benefit costs are rising. This does not
bode well for employers’ balance sheets," said Mr Bowers.

A
whole range of different pension scheme designs have been emerging, allowing
companies to share the risks of pension financing with their employees.

 "Some of the most popular designs are
career average, hybrid and shared-risk final salary schemes. Most of the new
arrangements provide a mixture of money purchase and final salary
elements," said Mr Bowers.

By Ben Willmott

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