Companies cut contributions to defined-benefit pension schemes

Multinational companies making changes to their defined-benefit (DB) pension schemes are cutting back on their contributions, according to new international research.

One-third of respondents said they were looking to make changes to their schemes in the near future and, in these plans, the average level of employer future service contributions will drop to 10%.

Chris Sheppard, head of Mercer’s Scheme Design Group, said: “A notable change has been the drop in average size of employer contribution. This reduces the cost of schemes. However, with employee contribution rates broadly the same, less company contribution has a detrimental impact on an employee’s retirement.”

The survey by Mercer found that only 14% of the companies surveyed said their DB schemes were open to future accrual, compared to 38% saying they were not. Nearly half of employers said their DB plans were closed to new entrants.

TUC general secretary Brendan Barber told Personnel Today: “Some changes will have been secured through negotiation with unions and employers working together to make defined-benefit schemes secure and sustainable. They give the lie to the notion that DB schemes cannot work today. Others will have been imposed on staff and represent little more than an employer retreat from decent pensions.”

He added that two out of three private sector staff were not in any employer backed pension and that the government review of the 2012 reforms will have the most impact on future pension provision.

For those companies considering making changes to their plans, the most popular tactics were found to be closing the scheme to future accrual and reducing the accrual rate. Other ideas include increasing member contributions, closing the scheme to new entrants, switching to CARE schemes or reducing pension increases.

Alison Bailey, head of policy and technical development at the Pensions Advisory Service, said: “A lot of companies are closing schemes to future accrual or putting in place other changes. So, for example, they might change the level of accrual. If they were providing one-60th of final salary for every year’s service they may change it to one-80th or they might be closing the schemes to future benefit accrual altogether.”

Mercer’s Scheme Design survey analysed responses from 220 multinational companies in the US, UK, Germany, France, Italy and the Benelux countries.

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