Membership of defined benefit pension schemes continues to fall, says industry survey

In its annual survey of pension schemes, covering 7.5 million workers, the National Association of Pension Funds (NAPF) found that 23% of defined benefit schemes were closed to both new staff and future contributions from workers who were already members of the scheme. Closures had increased by a third since last year, when 17% of such schemes were closed.

"Demographic and financial pressures mean businesses are struggling to afford these pensions. Many firms are trying to get a grip on the risks and rising costs by freezing the fund to both new and existing staff," said Joanne Segars, chief executive of the NAPF.

The NAPF survey showed the trend was set to continue. Of those defined benefit schemes which were now closed to new staff but still open to existing staff, 30% said they expected to transfer staff to a defined contribution pension over the next five years - meaning the employer will be exposed to less risk. A further 11% of scheme owners said that they would keep their existing pension scheme structure, but make it less generous.

Employers were closing defined benefit schemes to try to manage "risks and mounting costs", the NAPF said. Increasing life expectancy, poor investment results and increasing regulation meant that only 19% of such schemes in the private sector were now open to new joiners, compared with 88% 10 years ago.

However, the survey also revealed that total contributions from both employers and employees to alternative defined contribution pension schemes had remained stable at around 12% over the past five years despite the economic downturn.

Defined benefit pension schemes promise a set level of pension once an employee reaches retirement age no matter what happens to the stock market or the value of the pension investment. In a defined contribution scheme, the final value depends on the performance of the scheme member's individual contributions as the value of the 'pot' is used to buy an annuity once that member retires.

Pensions law expert Sarah Boon of Pinsent Masons, the law firm behind Out-Law.com, said that the increasing closure of defined benefit schemes by businesses was "unsurprising" given the current economic environment.

"It now looks highly unlikely we will ever see a reverse of this trend, with more and more employers turning to defined contribution solutions in which it is the member who bears the risk of poor investment performance and not the business," she said.

"What it does mean is that ensuring members make informed investment choices has never been more important, and improving defined contribution governance will be on everyone's agenda in the year to come," she said.

Almost half of the contract-based defined contribution schemes which responded to the survey said they had set up some form governance committee, with a further 18% planning to set up a management committee, the survey found. In addition, a third of trustee boards were chaired by an independent or professional trustee. The NAPF said that strong governance structures were "vital" to ensure savers received the best pension possible.

The survey also found that pension fund investments were moving away from 'riskier' assets. This year 42% of defined benefit pension fund assets were invested in equities, falling from 46% in 2010. The proportion of total assets invested in UK equities fell from 17.1% last year to 12.2%, the NAPF said.

NAPF chief executive Segars said that more change was certain, as final salary schemes were "either being watered-down or replaced altogether". However, scheme members were likely to find that the replacement pension on offer was a good one.

"It is encouraging to see that, despite the harsh economic climate, payments into defined contribution pensions by staff and their employers have remained stable. Whatever the type of pension, the main thing is to get more people saving. The UK simply isn't salting enough away for its old age," she said.