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DB firms foresee funding problems

More than three-quarters of employers with final-salary pensions expect to face future funding difficulties, according to the NAPF’s latest annual survey.

Ten per cent of private sector final-salary schemes closed to new members in 2004 compared with 26 per cent in 2003 and 19 per cent in 2002.

NAPF chief executive Christine Farnish says although the number of private sector DB schemes closing has slowed, rising costs are continuing to kill off final-salary schemes.

The average long-term funding costs for private sector employers with final salary schemes rose from 15.7 per cent in 2003 to 16.6 per cent in 2004. This compares to a cost to employers for DC schemes of 7.6 per cent.

The rise in costs comes on the back of 71 per cent of private sector schemes increasing employer contributions in order to address funding pressures with 41 per cent increasing employee contributions.

For employers with a main DC scheme and a closed DB scheme long-term costs have risen from 17.4 per cent to 21.3 per cent.

Thirty-four per cent, of DB scheme members are still working for the same employer while 37 per cent are now pensioners and 29 per cent deferred.

Farnish is pushing the Government to remove future salary expectations from pension scheme accounting standards as employers are not compelled to raise salaries. She is also recommending liabilities are discounted at a risk free rate derived from interest rate swaps rather than AA corporate bond rates, which would better match liabilities.

Farnish says: “Even the most committed firms are now struggling to manage costs and it seems that we are down to the bare bones of DB provision in the private sector.”

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