Almost half of DB scheme will shut their doors within 10 years, claims Watson Wyatt

More than 40 per cent of UK defined benefit schemes are likely to be closed to future accrual within the next five to 10 years, Watson Wyatt has warned.

Predicted in Watson Wyatt's Pension Plan Design Survey 2008, this would be a staggering increase from current levels, as only 6 per cent of defined benefit schemes are currently closed to future accrual.

The report goes on to warn that the proportion of defined benefit schemes open to new entrants is also expected to fall to 4 per cent over the same period. Currently 25 per cent of schemes are open to new entrants.

On a more positive note, Watson Wyatt said the market is seeing an increased focus on defined contribution provision instead. More than 60 per cent of employers predicted that employer contribution rates to defined contribution plans would increase in the next five to 10 years.

The survey also revealed total contribution rates to defined contribution plans has already increased by almost 2 per cent of salary in the last two years to an average 14.7 per cent. This figure increases to an average 16.9 per cent for plans with matching employer contributions.

Meanwhile, half of those employers questioned said they expect to attempt to remove their defined benefit legacy, either through a pensions buyout or other type of transaction, within the next 10 years.

Adrian Kidd, IFA for London-based Unleash Advice Partnership, said he could understand the rationale behind the closures however he expressed concern this could adversely impact on the public's already fragile confidence in the pensions industry.

He said: "Defined benefit schemes are expensive but it does raise the question about what people are going to do and how they will react.

"Some will find this to be almost a self fulfilling prophecy with regards the perceived untrustworthy nature of pension schemes.

"If an employer closes the defined benefit scheme and moves everyone across to a defined contribution scheme, will these people then feel inclined to pump money into a new scheme? Not really. I would hope this would not stop people saving and there is always the option of equity Isas as you do not have to purchase an annuity and you can get the cash when you want."

Defined contribution plans now make up 75 per cent of open work-based pension plans, and on average the plans provide employer contributions worth 9.5 per cent of salary in return for employee contributions of 5.2 per cent.