Defined benefit (DB) pension schemes run by FTSE 100 employers will completely die out within the next decade if the current rate of closure continues, according to Towers Watson.
The consultant’s FTSE 100 defined contribution (DC) pension scheme survey, which quizzed 90% of FTSE 100 firms about their pension provision, found 34% of companies have no employees earning DB pensions.
It said this represented a 4% increase since 2010 and if this pace of change were to continue, all FTSE 100 DB schemes would be ‘hard-closed’ – rather than simply closed to future accrual – within 10 years.
Towers Watson senior consultant Will Aitken said this is being driven by bigger-than-expected deficits and the loss of National Insurance rebates from 2016, as well as the introduction of auto-enrolment.
He said: “DC has long been most large employers’ vehicle of choice for new employees. Closing to new employees is not yet the norm but we are quickly getting there. If the pace in hard closure seen in recent years continued, all FTSE 100 schemes would be completely closed within a decade.”
In terms of DC provision, the survey found a decline in trust-based schemes this year with 45% of FTSE 100 firms offering such provision, compared with 48% last year, 50% in 2011 and 63% in 2010. Meanwhile, some 50% of members are enrolled into contract-based schemes and 5% in master trust arrangements.
It also found an increasing trend among trust-based schemes for using diversified growth funds (DGFs) in the accumulation phase as part of a ‘two-phased’ lifestyle strategy.
Such a strategy moves members from equities into DGFs during the growth phase before moving them into bonds and cash to match an annuity purchase. This is opposed to traditional lifestyle strategy which remains invested in equities for the entire duration of the growth phase before moving into cash and bonds for decumulation.
A typical FTSE 100 trust-based portfolio had 16% in DGFs at the start of the growth phase, compared with 22% at the end of the growth phase, the research found.
Senior investment consultant Nico Aspinall said the concern of having volatile equities as a single asset class driver for growth was “deeply ingrained” in trustees’ consciences which has resulted in an increased desire to diversify.
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