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The Actuary The magazine of the Institute & Faculty of Actuaries

Is DB pension closure the only option?

The firm believes that some employers might see closure as almost the default option in finding a way out of their pension problems, noting that three in every ten UK firms responding to its Global Pension Risk Survey had frozen their schemes to further accrual.

James Patten, benefits design specialist at Aon Hewitt, said:
"Many employers looking to deal with DB pension deficits will naturally feel freezing the scheme must lead to the greatest savings. With so many companies having done this to date, who would blame a cash-strapped employer for thinking that the best way to deal with a large pension deficit must be to turn the DB tap off?

"However, there are alternatives which may be more beneficial. For example, maintaining the DB arrangement but with pensionable pay growth capped at, say, 1% p.a., can often lead to deficit savings over 80% higher than those gained from DB closure."

Aon Hewitt admits that closure may the most sensible option for many but suggests that, as well as capping pensionable pay growth in a final salary scheme, firms may consider a career average arrangement or a cash balance design.

"This is a classic case of where we are discovering the best ways to tackle an issue as the market gains in experience," adds Patten. "Employers need to think about their own circumstances individually and judge the approach to take that way. There may be other benefits too - low cost DB alternatives can be more palatable to members than just freezing the DB scheme."