NAPF survey: Corporate U.K. DB plans closing at faster pace
By Thao Hua | January 27, 2013 7:00 pm
U.K. corporate defined benefit pension plans are closing at the fastest pace since 2005, with only 13% of DB funds open to new employees in 2012 compared to 19% the previous year, according to an annual survey published by the National Association of Pension Funds.
The number of companies that froze their DB plans also rose, to 31% in 2012 compared to 23% the previous year, according to the survey, which covered 1,018 mostly DB plans but also includes some defined contribution plans.
Aggregate assets of the NAPF members that responded to the survey totaled about £628 billion ($992 billion).
Among DB plans that remain open, 46% planned to close them within the next five years, while another 12% planned to make changes offering less-favorable terms to its members.
“The pressures on final salary pensions have proven too great for many businesses,” Joanne Segars, CEO of the NAPF, said in a news release about the survey. “The growing liabilities fueled by quantitative easing will have been a factor behind the record hike in closures.”
Quantitative easing by the Bank of England drove yields on U.K. government bonds further downward, increasing the estimated future pension liabilities, according to the survey. However due to favorable market conditions and additional contributions by companies, average funding levels generally improved in 2012, rising to 93% in 2012 compared to 92% the previous year. The average funding level remains below the 95% average reached in 2009, according to the survey.
Efforts continued at all U.K. DB pension funds to reduce investment portfolio risk in 2012. Equity allocations continued to drop, to an average of 35% of the investment portfolio in 2012 compared to 42% a year earlier, according to the survey. Fixed-income exposure rose to 39% from 33%. While investments in government bonds remained relatively stable, the allocation to corporate bonds increased to 15% in 2012 from 12% a year earlier. The remainder was invested in the “other” category of asset classes, including alternatives.
Five years earlier, the average pension fund invested 55% of the total portfolio in equities, 29% in bonds and 16% in “other” asset classes, according to the survey.
In 2012, the average closed DB plan had 46% of the investment portfolio allocated to fixed income, 27% in equities and 27% in “other” asset classes. In comparison, the average open DB plan allocated 38% of the total assets to fixed income, 37% to equities and the remainder to 'other' asset classes.