Thu, 05/12/2013 - 12:01
The rate of closure of defined benefit (DB) schemes eased this year, with 12 per cent of private sector DB schemes remaining open to new members, according to a survey by the National Association of Pension Funds (NAPF).
This represented very little change on a year-on-year basis (a drop of eight per cent) and significantly less than the drop of almost a third from 2011 (19 per cent) to 2012 (13 per cent).
The number of schemes closed to both new members and future accruals rose to 35 per cent from 31 per cent in 2012.
The number of schemes closed to new members, but open to future accruals, dropped to 53 per cent from 55 per cent in 2012.
Joanne Segars, chief executive, NAPF, says: “Pension funds are already grappling with significant economic and longevity issues. While it’s good to see a slower rate of DB scheme closure this year, they still face significant challenges. Of the DB schemes open to new members or future accruals that responded to our survey, 88 per cent are still contracted out, representing a membership of nearly two million people. They face uncertainty about how the state pension reform will affect them, for example the significant additional costs from the loss of the national insurance rebate. That is why the NAPF has called on the government urgently to bring forward solutions to help schemes navigate these changes.”
The survey covered 950,000 DC members (805,000 active and 145,000 deferred), a 37 per cent increase from 2012. The average contribution rate was 12.1 per cent, with eight per cent coming from the employer.
On average, respondent DC schemes offered 13 different investment funds to their members and nine out of ten offered a default fund. Where available, the vast majority of members (84 per cent) are likely to remain in the default fund. Most (96 per cent) of the scheme default funds use a lifestyle strategy for members approaching retirement and, on average, investment funds review their default fund every three years.
Most (91 per cent) schemes made some form of charge to members: 79 per cent made an annual management charge (AMC), by far the most common method of charging; and 77 per cent of schemes said the employer paid the costs of external advisers. The average AMC for a DC scheme was 0.46 per cent, within a range from 0.004 per cent to 1.2 per cent.
Three quarters (75 per cent) of respondents told members about the open market option for annuities, up from 68 per cent in 2012, while 60 per cent encouraged members to obtain independent financial advice. Only six per cent reported they offered scheme members no support at all.
Segars says: “With 80 per cent of DC members remaining in a default fund, the fund’s design and investment strategy are crucial. But charges also affect member outcomes; it is important that charges are both transparent and reasonable, and, while the average charge was 0.46 per cent, the range in this year’s survey was wide. In November 2012 the NAPF published a join industry code of conduct – Pension Charges Made Clear. Awareness of, and commitment to, the code is growing – 85 per cent of our survey respondents had heard of the code and three quarters planned to implement it. We still want to see more schemes offering at-retirement services that help scheme members select the best product, as our research shows that retirees each year could be GBP1bn better off if they secured a good annuity deal.”
The appetite for de-risking continues to grow among DB schemes. Four out of ten DB respondents reported that their appetite for liability matching assets had increased in the last 12 months. Over a third of DB schemes had invested in commercial real estate and a further 11 per cent had considered it. Of those who responded, almost a quarter (23 per cent) of DB schemes had made some investment in infrastructure and a further 18 per cent had considered investing.
Segars says: “In an economic climate of long-term low interest rates, funds are considering how to broaden their investments. The NAPF has argued strongly for some time that it should be easier for institutional investors to invest in infrastructure as an asset class, and our survey shows growing member interest in this form of investment.
“We’ve seen a significant level of interest in the Pensions Infrastructure Platform from pension funds, and the government’s National Infrastructure Plan 2013 is also welcome. However, the government’s plan must provide a pipeline of assets that are suitable investment vehicles for pension funds, including assets with strong inflation-linkage to help pension funds match their liabilities.”
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