Tesco’s plans to close its salary-linked pension scheme will put renewed pressure on the handful of large employers still offering older style “defined benefit” plans, consultants have warned.
DB schemes — which can include final-salary, career-average and cash-balance plans — all involve an employer making a promise to pay a retirement benefit to a member. However, the cost of meeting these promises has steadily increased as pension members live longer, putting more pressure on schemes to fund their future liabilities.
Last week, Tesco announced a consultation on closing its defined benefit pension scheme — one of the largest in the private sector with 350,000 members and a £3bn deficit — as part of the most radical overhaul of the retail group in its 96-year history.
It was one of several measures designed to save the company £250m a year.
But Jon Hatchett, head of corporate consulting at Hymans Robertson, the specialist pension scheme advisers, said: “Tesco’s decision to close will leave just three DB pension schemes of FTSE 100 companies remaining open to new members — Morrison's, Diageo and Johnson Matthey.”
He said the closure of Tesco’s DB scheme, if its proposals are adopted, would lead other large employers to make similar moves.
“For UK plc, the road to reducing their exposure to their pension scheme liabilities will move on to phase two and closure to future accrual.”
Commentators have also warned that the last salary-related pension schemes could disappear entirely with the end of “ contracting out” — a rule that allows employers to pay a lower rate of national insurance for pension scheme members.
“Employers face their payroll costs rising by up to 3 per cent with the end of contracting out in 2016,” said Adrian Hartshorn, senior partner in the financial strategy group, with Mercer, the pension consultants.
“Faced with these cost pressures, my sense is that we will see those schemes that are still open to future accrual close over next two years.”
Tesco’s DB plan was among the largest in the UK private sector, and was an increasingly rare throwback to an era when employers offered “traditional” salary-related company pensions.
With traditional DB pensions, employers shoulder the risk of funding members’ retirement income for life — giving blue-collar workers the same pension guarantees as bosses in the boardroom.
However, over the past decade, these “gold-plated” schemes have been closed or watered down by employers who have struggled under the weight of rising liabilities and ballooning funding deficits.
In 2004, one in five FTSE 100 employers had an open DB plan. By 2014, no FTSE 100 employer offered a final salary scheme, considered the “Rolls-Royce” of DB schemes, to new joiners.
“The thing that is most interesting is that it has taken Tesco so long to fully close its DB scheme,” said John Ralfe, an independent pensions consultant.
“It has been tinkering for a while by soft closing its final-salary plan and then shifting staff on to a less generous career-average plan, but it didn’t fully close.”
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