London: 6 September, 2005 - Most UK companies have now closed their defined benefit (DB) pension schemes to new members. [i]  Yet 70% of companies have no exit strategy in place for their DB pension scheme, despite the fact that 88% of UK companies operating a closed scheme continue to be significantly concerned by the drain on their finances.  This is according to recent research from Aon Consulting, a leading pension, benefits and HR consulting firm, who surveyed 130 UK companies operating DB schemes that are closed to new entrants[ii].

To assess the scale of the problem for companies, Aon Consulting analysed the position of the 200 largest DB pension funds[iii].  These pension funds have total assets of £400 billion, which is over 30% of the market capitalisation of their sponsoring companies.  For 50 of these funds, the pension fund is bigger than the market capitalisation of the company. 

Donald Duval, Chief Actuary at Aon Consulting said: “A company which doesn’t have a strategy for managing its pensions legacy properly is likely to get a poorer return on its assets, and to have higher liabilities, than one with a clearly defined and executed strategy.  If the difference is only 10%, then this translates into a lost opportunity of £28bn for UK companies⁴.  Where the pension fund is bigger than the company, then an extra 1% performance in the pension fund should translate into more than 1% on the share price.”

Paul Belok, Principal & Actuary at Aon Consulting, said: “Even once DB schemes are closed to new entrants, the cost and risk burdens do not just disappear overnight.  Companies need to be aware that it is likely that costs will even escalate due to a lack of new money flowing into a scheme, creating an increased reliance on company contributions and investment returns.” 

Other findings resulting from the closed scheme research included:

• Almost half (43%) of companies still perceived their closed schemes as an unwanted legacy, with this figure rising to almost 60% where the scheme had been closed for five years or more. 
• 72% of companies estimate that their DB schemes will continue to remain a concern for at least another ten years.

Belok continued: “There is no question that DB schemes are causing a major financial headache for companies. For finance directors, the issue is now very much on the radar screen, particularly with the majority of schemes having a significant shortfall. As the percentage of the workforce remaining in the DB scheme dwindles, the more the scheme is seen as an unwanted legacy. It is important therefore, that employers realise that even when a scheme is closed, it will still impose a significant financial burden to an organization.   This risk cannot be overlooked and will need to be actively managed for many years to come.  We believe that employers must take steps to reduce this period of uncertainty.”

Notes to Editors:

1. (ACA) 2005 Pension Trends Survey showed 68% of companies have closed their defined benefit schemes to new employees.
2. Aon Consulting surveyed 130 UK companies operating closed defined benefit schemes during April and May 2005.
3. Aon Consulting’s UK research looks at the disclosure of pension information of 200 of the largest UK companies – including all UK FTSE 100 companies with DB schemes; a significant proportion of companies from the FTSE 250 with DB schemes, and; the remaining number of companies were listed with the NAPF, as having pension fund assets in excess of £100m. The total market capitalisation of the companies in the research was £1262bn, and the pension funds have assets of £393 bn.
4. 70% of 10% of pension fund assets.
    

About Aon Consulting

Aon Consulting is a leading human capital consultancy, helping organisations of every size to attract and keep the employees they need. We advise on all aspects of employment, including health-related insurance and risk; employee compensation and pensions; human resource strategy planning; job design and change management; and staff assessment and legal issues.

Aon Consulting is a division of Aon, the UK's largest insurance broker and provider of risk management services and a major force in reinsurance and the UK human capital consulting market.  Aon Consulting Limited is authorised and regulated by the Financial Services Authority.

About Aon

Aon Corporation ( http://www.aon.com ) is a leading provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. There are 47,000 employees working in Aon's 500 offices in more than 120 countries.  Backed by broad resources, industry knowledge and technical expertise, Aon professionals help a wide range of clients develop effective risk management and workforce productivity solutions.

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