Closed Defined Benefit Schemes

Many defined benefit pension schemes are now closed to new entrants, and of those a good proportion have closed also to future pension accrual  These schemes have the potential to run for many more years, with the number of members gradually declining. During this process there is a danger that the scheme becomes less relevant to the ongoing business, in effect “orphaned”, and both a time and cost burden to management where it was originally a valuable asset to aid recruitment and retention.

We recognize the problems inherent in running such a “legacy” scheme and, while we do not pretend that we can remove these problems completely, we can help shoulder the burden and make the problems more manageable, including through the use of tailored funding and investment strategies.

It is tempting to assume that, if your scheme carries on until the last member dies, the overall cost will be less than if it had been wound up earlier.  The basis for this assumption is usually that the scheme will be able to invest the assets to earn a consistently better investment return than that underlying the cost of buying out all the benefits.

Even if this could be guaranteed, it ignores the costs being incurred to run the scheme year by year.  These costs include employer contributions to remove any funding deficit, levies, management time and all the expenses of running the scheme.

Running a closed scheme also exposes the company to the risks:

• that members will live  – and draw their pension – for longer than expected,
• that gains on Equity investments will be lost through further stock market falls,
• that interest rates will fall, causing the value of the liabilities to rise,
• that unanticipated inflation will cause the liabilities to be higher than expected.

Naturally, the objective of both Trustees and Company will be that the scheme should eventually be determined at a lower cost than would have been incurred by buying out all the benefits now.  However, to achieve this goal it is necessary to exercise control over the risks that are being taken and the costs that are being incurred.

Please contact us to learn more about our Closed Scheme Solutions that give you more time to concentrate on looking to the future of your business.