London: 3 October, 2005 - Almost 7 in 10 UK companies who have closed their defined benefit (DB) pension scheme to new employees still believe that the scheme is a fundamental component of the employee benefit package they offer.  This is in the context of a recent ACA 2005 Pension Trends Survey which showed that approximately 68% of UK companies have closed their defined benefit schemes to new entrants. 

Typically, defined benefit schemes are significantly more generous than the average Defined Contribution (DC) arrangement.   According to Aon Consulting, who surveyed 130 UK companies operating DB schemes that are closed to new entrants, 49% of respondents are also worried about the potential backlash from employees that may result from different pension arrangements being offered to employees dependent on when they joined the company.  

Donald Duval, Chief Actuary at Aon Consulting said: “Given the amount of money that companies are having to plunge into DB schemes, it is not surprising that a majority of employers see the scheme as a valuable part of the total benefits package.  However, as the proportion of total employees who are in the DB scheme reduces the perception of the value for the employer changes.  Under these circumstances, employers are becoming increasingly concerned about operating a ‘two-tier’ benefit system with workers who do the same job ending up getting different benefits.”  

There is also some legal risk associated with a two-tier system as offering different benefits to different groups might be seen to be age discriminatory.  This is because it is likely that older employees would be the ones to receive more generous DB benefits while newer – and in most cases younger – staff, will only have the option to join a DC scheme.  However, the greater risk is to employee relations, as people doing the same job may get very different benefits.

Paul Belok, Principal and Actuary at Aon Consulting, added: “Employers need to ensure they do not ignore potential difficulties arising from offering two or more types of pensions.  Whilst companies should closely monitor the legal situation, HR directors and company executives also need to be prepared to justify differences in benefits from one employee to the next in the context of pay bargaining and other negotiations with employee representatives.

“We expect to see an increasing ambivalence towards schemes on the part of employers as more of the workforce shifts to DC and two tier benefits become an issue for employees and unions.  On the other hand, those employees still in a DB scheme will value the benefit more and more whilst those employees involved in a DC scheme will need to be reassured about the value of their pension arrangement.” 

In order to re-balance employee perceptions of DB and DC schemes and limit the risk to staff morale, organisations should:

1. Review and improve their internal communications strategies in relation to benefit provision
2. Be clear about what benefits are on offer and how employees can get the most out of what is available
3. Offer employees access to information about alternative pension saving options - consider approved financial advisers
4. Re-consider the two tier approach and ensure the company’s position is clear and defensible.

Notes to Editors:

Aon Consulting surveyed 130 UK companies operating closed defined benefit schemes during April and May 2005.  If you would like to receive a copy of the report, please contact Lisa Ford on 020 8 970 4475.



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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