Pensions - Articles - More DB sponsors than expected will absorb increased NI cost

Despite the loss of National Insurance rebates costing up to an additional 5% of payroll from April 2016, Xerox HR Services believes more sponsors of Defined Benefit (‘DB’) schemes than expected will absorb the cost and continue to provide future accrual on a DB basis into the next tax year and beyond.

 Mark van den Berghen, Head of Financial Risk Management at Xerox HR Services said: “While costs will increase due to the loss of NI rebates, the increase has not been seen as high enough to trigger the potentially controversial process of closing schemes to future accrual. Such a process involves the last remaining employed members in DB schemes who are generally the longest servers at the sponsor, appreciate the value of their DB pension and have key corporate responsibilities. The decision to close a DB scheme to future accrual is only typically entered into as an act of last resort.”

 Xerox HR Services estimates that for every 100 employees still accruing benefits within DB schemes, employers will see an increase of up to £102,000 in National Insurance contributions. This is a direct result of the new flat rate state pension and the cessation of contracting out. To avoid this increased cost, DB schemes needed to be amended to maintain the same levels of cost.

 Mr van den Berghen adds “There is an underlying resignation that costs for DB schemes are expected to keep increasing. For example, some schemes saw millions of pounds added to their deficits over the first 6 weeks of 2016 due to falls in equity prices and bond yield. This puts absorbing an additional £100,000 per annum into perspective.”

 “The good news is that for employees continuing in these open DB schemes, while they will see an increase in their own NI, they are likely to receive an overall increase in their pension at retirement when including state provision - that is, if the review into the State Pension Age launched yesterday by the government results in future changes to the State pension.”

 “For DB schemes that remain open to future accrual, I am encouraging clients to focus on managing their volatility going forward to minimise future hikes in costs. For example, reducing exposure to interest and inflation risk, de-risking by increasing standard transfer values to provide members with more attractive options and considering insurance solutions – especially given the particularly attractive pricing for medically underwritten bulk annuities currently.”

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