Pandemic drives new wave of benefit change
What you need to know
- With the onset of the COVID-19 pandemic in 2020, a number of employers sought to manage costs and risks to protect businesses and employment. A number of industries saw revenue fall and needed to manage costs.
- The Government's Coronavirus Job Retention Scheme has certainly helped with meeting employment costs, but the scheme only covered auto-enrolment minimum pension contributions and even then only until July 2020.
- At the same time, the cost of defined benefit pensions was set to increase when next calculated by the pension scheme. The costs typically reflect long term interest rates which had fallen significantly during the pandemic.
- Against this backdrop we carried out a survey to understand actions employers were taking on managing pension cost for their current employees. This survey of 450 clients has indicated a sharp increase in employers looking to close their DB pension schemes to future accrual.
Actions you can take
- Assess expected costs and associated risk given your current benefit design.
- Decide if contingency plans are needed to manage benefit cost.
- If change is needed, consider your alternative benefit options.
- Measure the cost of your preferred benefit structure on your long term funding target.
- If making a change, plan how to effectively communicate in the current environment.
The finer detail: trends and best practice on benefit change
Reasons employers consider benefit change
Past reasons for changes to DB benefits
• Cost and risk management have always been primary reasons for employers to conduct benefit reviews of their DB scheme
• Historically such benefit reviews did not necessarily lead to closure.
• Almost a third of schemes in our survey also cited alignment of benefits across their employees as an additional reason for benefit review.
What does the future hold?
• COVID-19 continues to make economic conditions challenging and we expect to see more activity in this area in the coming years.
• In today’s uncertain economic world, cost and risk management has become even more prevalent and the majority of our 2020 reviews are actively considering closure.
• The Coronavirus Job Retention Scheme has been extended to the end of April 2021 but this does not cover pension contributions, and as a result has meant employers have had to consider how to manage pension costs.
• The Pensions Regulator’s 2020 funding consultation, and the consultation expected later this year may result in further reviews down the line, but currently COVID-19 is the prime reason for review.
"The Pensions Regulator’s funding consultations could result in further benefit review in coming years, but for now COVID-19 has undoubtedly brought benefit change back on the agenda for many corporates."
- Jamie Hunter, Head of Benefit Change
For further information, please get in touch with Jamie Hunter or speak to your usual XPS contact.