OREANDA-NEWS. October 26, 2015. Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE:AON), has said that as the full effect of pressures such as the ending of contracting-out and low bond yields become evident, it expects over the next 12 months to see more employers closing their defined benefit (DB) pension arrangements to future accrual. A recent Aon Hewitt survey of over 100 pension schemes of between ?10 million and ?10 billion showed a marked increase from last year in the number that were planning to close to defined benefit accrual.

James Patten, head of Pension Benefit Design at Aon Hewitt, said:
"While companies have been aware for some time that the cessation of contracting-out from April 2016 will lead to cost increases, this is proving to be a minor headwind relative to the tempest created by low bond yields and recent equity market turmoil. These have created soaring cash funding requirements and dents in reported profitability.
“Our recent survey of UK schemes has shown a continued surge in the number of schemes in the private sector that are closed or closing to DB accrual. Around a third of all companies with ongoing DB arrangements, that have reached a view on how they respond to contracting-out, are looking to make more significant changes than purely offsetting the additional National Insurance (NI) payable from April 2016. In the vast majority of these cases this will mean closure to DB accrual.

“Accordingly, with nearly 30% of the contracted-out schemes that are currently open to DB accrual potentially closing during 2016, the proportion of DB schemes in the private sector that are closed to DB accrual could rise from around 50% at present to over 60% over the next year.”

James Patten continued:
“Our survey has shown that there are relatively few employers looking purely to mitigate the cost of contracting-out – it was just 12% of those surveyed where the employer had reached a view on the matter. It seems that employers are now typically either making more significant changes due to current market conditions or are choosing to stomach the cost - perhaps because they have already made changes to their scheme.

“However, a significant proportion of employers have yet to decide how to respond to the ending of contracting-out. We are finding many employers are looking to act quickly once a decision is made on the benefits. But a few past cases have demonstrated some of the pitfalls involved. Having support to execute these projects efficiently, sensitively and in a legally compliant fashion will be vital to ensure that changes are in place by Spring 2016, when the extra NI cost burden will start to impact on financial results.”