The cost of providing a corporate defined benefit plan in the U.K. has risen to the equivalent of 50% of employee pay, due in part to the U.K.'s vote to leave the European Union, shows an analysis by Hymans Robertson.
The consultant said Tuesday that the Bank of England's policy response to economic uncertainty caused by Brexit — to cut interest rates to 0.25% from 0.5%, and to extend quantitative easing — had contributed to the increase. Two years ago, providing a pension plan equated to about 40% of pay.
“This is clearly unsustainable for the majority of employers,” said Jon Hatchett, partner and head of corporate consulting at Hymans Robertson, in a statement accompanying the analysis. “Unsurprisingly, we're likely to see the last remaining open private-sector schemes close and a number of high-profile employers have indicated in recent weeks this is a path they'll be forced down.”
Defined contribution plans have also taken a hit. An analysis of 500,000 DC participants' plans by Hymans Robertson shows three-quarters of participants will retire on an inadequate income, up from two-thirds pre-Brexit.
Separately, research by JLT Employee Benefits shows that only 11 FTSE 250 companies still provide DB benefits to a significant number of employees, which JLT “defined as incurring ongoing DB service cost of more than 5% of total payroll.”
The total amount of contributions aimed at reducing pension fund deficits by FTSE 250 companies was £1.22 billion ($1.6 billion) over the year ended Dec. 31, compared with £1.4 billion the previous year.