What to do with defined benefit schemes

Any review of defined-benefit pension schemes should start with some simple questions, says Logan Anderson of the Pensions Trust

Years ago, many organisations set up defined-benefit pension schemes to look after their employees in retirement. These schemes are now mostly closed to new members to reduce costs and risks, but they still pose problems for many organisations. Costs are increasing, trustees for the schemes are difficult to find and the funding and investment risks have worsened.

When considering what to do about a defined-benefit scheme that is closed to new members, one place to start is to carry out a review of the scheme. A review should identify key issues, explore options for dealing with them and propose suitable solutions.

Start with some simple questions. How does the legacy scheme benefit your organisation? Is it a valuable staff-retention tool? What is it costing, and how much can you afford? What risks does it present to the organisation? Can these be managed at an acceptable cost? Does it worry donors?

Once you are clear on the issues and objectives, consider whether you need - and can afford - a consultant to conduct a further review.

Several options are likely to emerge from a review, one of which is to keep defined-benefit provision. If it is important to your organisation, it may be possible to control the costs and risks.

Reducing the benefits your employees accrue for future service is one way to control risk and save money; switching from a 'final salary' to a 'career average' design is another. A 'cash balance' design might appeal to employers uneasy about removing defined-benefit provision completely. The employer promises and takes on the risk of providing a lump sum at retirement - 15 per cent of pay for each year of service, for example - which is used to buy a pension for members.

However, if these options present investment and funding risks that are unacceptable, a more radical solution may be needed.

One option is to close the scheme to future accrual, but this should be approached with caution because it can cause the scheme to be wound up, putting the pension scheme trustees in the driving seat. If a scheme is wound up, solvent employers must provide members' accrued benefits in full.

Once a scheme is wound up, members' pension benefits can be provided in line with the arrangements offered to the rest of the workforce. However, taking legal advice is essential. And if there are more than 50 employees in a scheme, consultation with affected members is required if changes such as reducing or stopping future accruals in the scheme are proposed.

Have you registered with us yet?

Register now to enjoy more articles and free email bulletins

Already registered?
Sign in

Before commenting please read our rules for commenting on articles.

If you see a comment you find offensive, you can flag it as inappropriate. In the top right-hand corner of an individual comment, you will see 'flag as inappropriate'. Clicking this prompts us to review the comment. For further information see our rules for commenting on articles.

comments powered by Disqus