Even before the onset of the global financial crisis, 20% of large UK corporate pension plan sponsors were giving serious thought to selling off their final salary pension obligations in whole or in part, according to the results of Greenwich Associates 2008 United Kingdom Pension Fund Study.
Motivated in large part by mark-to-market accounting rules, large UK companies were among the first in the world to begin exploring new options for limiting the risks posed by existing defined benefit plans. They did so initially by closing their plans to new members 68% of UK defined benefit plans are now closed to new entrants and then by testing new portfolio management techniques such as asset-liability matching and liability-driven investing strategies. But now, a growing number of UK plan sponsors are being drawn to a solution that is at once simpler and more radical: pension buyouts.
That overall average of 20% of UK plan sponsors that have considered pension buyouts masks a dramatic split: Virtually all of the companies contemplating such a move have pension fund assets of 2 billion or less. Among companies with bigger funds, virtually none only 2% say they have considered the buyout option. The reluctance of these large plan sponsors to seriously consider a buyout likely reflects both the economic challenges of transferring a multi-billion-pound pension obligation and the practical difficulties that would arise from a prominent UK company offloading its pension obligations, says Greenwich Associates consultant William Wechsler.
The proportion of UK final salary plan closures was unchanged from 2007 to 2008 after several years of consistent increases. The slowdown in plan closures could be a function of extreme market volatility in the second half of 2007, which might have prompted some plan sponsors to postpone major strategic decisions like whether to close plans to new employees. It does appear, however, that the U.K. market is at least approaching a natural ceiling for plan closures, and that future closures will occur at a much slower rate.
With two-thirds of UK final salary plans closed to new employees and many small corporate plan sponsors looking to get out of the pension business entirely, the day is fast approaching when the majority of U.K. workers will rely on defined contribution plans as their primary and in many cases only retirement savings vehicle.
DC plans currently hold approximately 5% of total UK retirement assets, but plan sponsors expect that share to jump to more than 20% by 2018. DC plans already account for a meaningful share of total retirement assets among the countrys smallest companies: Corporate plan sponsors with less than 200 million in plan assets say their DC plans now hold more than 23% of assets, a share they expect to top 30% in the next 10 years.
Although virtually all corporate plan sponsors in the United Kingdom offer DC plans to their employees, about one in 10 say they plan to open a new plan within the next two years. The reason: Many DC plans were established years ago as complements to still-open defined benefit plans. As the final salary system begins to fade, plan sponsors are realizing that some existing DC structures might not be up to the task of fully funding their employees retirements.
In new and existing plans, plan sponsors are adding improved offerings designed specifically to overcome previously identified DC shortcomings. In addition to the increasing use of features such as automatic enrollment, about 10% of plan sponsors say they have plans in place to offer participants products including new balanced funds incorporating a broad range of asset classes, lifestyle funds or alternative assets. Slightly smaller shares say they plan to offer DC participants multi-manager options or property unit trusts.
One major change on the immediate horizon for DC plan sponsors is new legislation calling for the creation of personal savings accounts for UK workers by 2012. Under the new law, employees will be automatically enrolled in a personal savings account, to which employers will be obligated to contribute up to 3% of salary if the employee first makes a 4% contribution of his or her own. The government will contribute another 1%.
D.C.