Nearly three quarters (72 per cent) of defined benefit (DB) pension schemes are now closed to future accrual, representing a 4-percentage point increase on 2020, research from Aon has revealed.

According to the research, nearly all (94 per cent) DB schemes are closed to new entrants and, when excluding regulated industries where employee benefits may be protected, the proportion of respondents that have closed DB schemes to accrual rises to 77 per cent.

The survey of over 330 DB pension schemes showed that the majority (88 percent) of companies have reviewed DB benefits in some way, with 16 per cent of employers deciding to maintain future DB accrual but with changes to the design to lower the costs.

Meanwhile, just 12 per cent of schemes have made no changes so far, compared to 15 per cent in 2020.

Aon also raised concerns that more scheme sponsors may consider closing their schemes to future accrual given the uncertain economic environment and potential recession.

However, the report also found a growing focus on communication alongside these DB reviews and closures, as the survey found that, in the past five years, 87 percent of DB closures have offered member support over and above the statutory minimum consultation requirements.

The report also highlighted the continued importance of concessions, where benefits are improved beyond the employer’s current approach for new hires in a defined contribution (DC) environment.

In particular, enhanced ancillary benefits such as life cover and redundancy terms, as well as higher DC contribution rates, remain the most popular, alongside cash lump sums.

According to the report, 77 per cent of DB closures over the past five years provided some form of concession, and in 60 percent of cases where a concession was offered, there was an enhancement to DC terms for former DB members.

In addition to this, over the past five years, 15 percent of closure projects also reviewed and changed DC benefits for existing DC members, which Aon highlighted as demonstration of the "common goal" to harmonise benefits for employees.

Cash has also become more common since the 2020 survey, although offering an enhanced revaluation such as retaining a link to salary growth has become less common, which Aon suggested is in line with more schemes dovetailing a DB freeze in preparation for a buyout.

Commenting on the findings, Aon partner, James Patten, stated: “Increased closure of DB schemes was a pattern we saw emerge after the 2008 financial crisis and it seems possible that it could be repeated as we go into 2023, with organisations navigating new forms of volatility.

"Furthermore, following the rise in gilt yields, the size of the gap between projected DB and DC benefits for members after DB closure is a lot narrower.

“This all potentially means the news of closure may be less difficult for employees to accept. Given these factors, some employers may therefore take the view that now is the right time to embark on a potentially sensitive project.

“With the recent market volatility and improvement in funding levels, there is another driver in play. For many schemes, closure to future accrual would also be a key step in preparing to buyout benefits with insurers. Some schemes that had closed to accrual and retained a salary link on past service will also be seeking to change these ahead of a buyout.

“There is now an increasing emphasis on one-to-one meetings with professional advisers, offering personal illustrations that show the impact of the proposals, as well as town hall meetings and dedicated mailboxes.

"Experience shows that direct and open communication with members - helping them to understand the changes and the impact on them as individuals - has become more important to the ultimate success of a DB closure.”

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