FTSE 350 firms plan to shut pension schemes to new members

FTSE 350 firms plan to shut pension schemes to new members

All FTSE 350 companies are likely to close their defined benefit (DB) pension schemes to future accrual by 2027, according to research by actuarial firm Hymans Robertson.

According to the report, FTSE350 Pensions Analysis, over half (55 per cent) of these firms have already closed their DB funds.

The move is driven by an increase in the cost of DB pensions, which are set to rise for the companies as there will be pressure to increase deficit contributions from The Pensions Regulator (TPR), especially after cases like BHS and British Steel.

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After BHS entered into administration in April 2016, a £363m settlement with Sir Philip Green, the department store's former owner, was reached to fund a new independent pension scheme for 19,000 former BHS workers.

In August, Tata Steel UK (TSUK) got the go-ahead to offload British Steel Pension Scheme and create a new DB fund.

As part of the deal, TPR gave its formal approval to a regulated apportionment arrangement (RAA). Some 130,000 members have to choose by 22 December if they want to be transferred to a new scheme being created, BSPS II, or remain in the old DB plan which will be moved to the lifeboat scheme, the Pension Protection Fund (PPF).

According to Jon Hatchett, head of corporate consulting at Hymans Robertson, following the resolution of these cases, the regulator “is now taking a tougher line of DB funding”.

He said: “The upshot is companies will be under greater pressure from trustees, with the backing of the regulator, to pay more cash towards deficits.

“We’ve seen a pendulum swing away from the recognition that a strong employer is better able to support its pension scheme, to an expectation of annual deficit contributions increasing when schemes are behind plan.”

Mr Hatchett argued that the only companies that won’t need to contribute more cash in “are those that have hedged most of their inflation or yield risk, and that are therefore still on track, or those where affordability is genuinely stretched”.

However, this focus could have unintended consequences, he warned.

He said: "The focus on deficit contributions is too simplistic. Worse, it creates an incentive to take more investment risk at a time when for many maturing schemes these risks should be dialled down.

“The prevailing sentiment that ‘longer recovery periods are bad’ should be challenged. A longer recovery period, with a plan that has a greater chance of achieving its targets, can be better for employers and scheme members. 

“We must remember that DB pension promises typically extend for the best part of a century, we don’t need to rush towards the exit and risk tripping over our own shoelaces.”

Mr Hatchett added that a fall in yields mean “required future service contributions can now be 40 to 50 per cent of pay”. 

The report also stated that companies paying out more in annual dividends than they pay into their pension schemes can expect to come under greater scrutiny from the regulator.