Employers reluctantly shut defined benefit schemes

POOR stock market returns and a change in accounting laws are forcing companies to abandon defined benefit pension plans, an expert has warned.

Ken McKenna, managing director, IFG Financial Services, said employers were reluctantly shutting their defined benefit schemes because they feared markets will never pick up after the dramatic falls of the past three.

There are a number of issues currently making trustees and companies very nervous, he said.

Poor market returns and a problem with continuing salary inflation are key issues at the moment, he said.

“The two together are very bad news for defined benefit schemes,” he said.

Jim Power, chief economist, Friends First said the stock market pessimism was over done.

He told an IFG seminar in Dublin there was no need to panic. “In the medium term, with low interest rates likely to persist, equities will again out perform all other asset classes.”

While that may be so he added that managers in the future will have to take a more pro-active approach to the management of pension schemes if they are to deliver on their promises to employees.

Speaking after the seminar he said he understood that trustees and companies were concerned with future liabilities and the introduction of FRS 17 where pension liabilities have to be fully accounted for, annually adding to the concerns of firms with defined benefit plans, especially those who are publicly quoted, he said.

McKenna said he was worried that good schemes were being closed unnecessarily. “There’s a tendency for people out there to have a knee jerk reaction. There are a lot of people closing down defined benefit schemes and on the basis of my portfolio everybody is talking about it. From various surveys that have been done it would seem that there are a lot of defined benefit schemes closing down to new entrants.”

Companies might be keeping existing employees covered and any new employees are being put into defined contribution arrangements, he said.

Mr McKenna claimed that employers don’t want to close down their defined benefit plans but “they are being driven to it because of poor investment performance and new accounting standards,” he said.