Fewer of the UK’s largest firms are offering substantial defined benefit (DB) pension schemes.
The number of FTSE 100 companies offering sizeable DB schemes dropped from 65 to 56 in the 12 months to September, according to figures released yesterday by consultants JLT Employee Benefits. A DB scheme is defined as sizeable if the costs of it are more than one per cent of the respective company’s total payroll.
Of those providing DB schemes, 24 are providing them at a level that is equivalent to their total wage bill.
A defined benefit pension scheme – also know as a salary-related pension scheme – is based on past earnings as opposed to investment returns.
“It is with no surprise that fewer and fewer FTSE 100 companies are offering DB pension benefits as the risks and costs associated with their provision become too great to bear, as evidenced by Tesco’s recent announced proposal to close its DB pension scheme to all members – an inexorable trend, which is now endemic in the private sector; even amongst the very largest employers,” said Charles Cowling, director of JLT Employee Benefits.
“Indeed we expect to hear further similar announcements from other companies in 2015.”
Cowling explains that despite DB pension funds seeing good investment performance, the benefit was outweighed by greater liabilities. Part of this is due to continued falls in interest rates.
“This low interest rate and low bond yields environment is expected to continue into 2015 and beyond, maintaining the funding pressure on pension schemes,” Cowling said.