The future of defined benefit pensions: Can employers keep their promises?
As an employer, you’ve likely been navigating the shifting landscape of pensions for some time now. Once a staple of workplace retirement plans, defined benefit (DB) pensions are becoming less common.
However, despite fewer companies offering them, many employers still carry the responsibility of managing these plans. The challenge remains: how can you continue to fulfil your obligations to employees while balancing financial sustainability?
Declining numbers and increasing pressures
According to a House of Commons Committee report published in 2024, the number of DB pensions has decreased significantly in recent years. From 7,300 in 2012 to just 5,297 in 2023, many employers have either closed their schemes or limited their scope. The trend is clear: fewer new employees are joining these plans and a large number of existing ones are closed to future accruals.
As of 2023, 72% of DB schemes were closed to new contributions, up from 41% in 2012. This reduction in DB pensions can put pressure on companies that are still managing these pensions, as they try to balance the legacy of previous commitments with the realities of modern business operations.
Stronger funding but challenges remain
Despite the decline in numbers, DB schemes have made strides in improving their financial positions. Many are now operating at a surplus, with the PPF 7800 index reporting an aggregate surplus of £442.3 billion as of February 2024. The funding ratio has reached 146.1%, a significant improvement since March 2021.
However, while these numbers reflect healthier financials, the question remains: can this momentum be maintained? Employers must continue to carefully monitor these plans, ensuring they meet the regulatory requirements set by the Pension Schemes Act 2021, which now dictates stricter funding and covenant assessments.
Consolidation: A practical solution
Consolidation is becoming a key trend within the pension industry. Numerous smaller DB schemes are looking to merge with larger ones or transfer their liabilities to insurers through buyouts. This is often seen as an attractive option for employers who want to remove the ongoing risk the pension scheme represents.
If your company is facing this challenge, a buyout or consolidation may offer a path forward. This strategy could provide a way to secure pension benefits while reducing your administrative and financial burdens.
Can employers keep their promises?
Despite the challenges, employers can still manage DB pensions effectively. Engaging with defined benefit pension scheme advisory services could help you understand new regulatory requirements and ensure your plan remains compliant.
Staying informed and being proactive will give you the best chance to continue to meet your obligations and ensure the long-term sustainability of your pension arrangements.
