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Multinationals close the door on defined benefit pensions as deficits become unmanageable, says PwC survey

· Death of DB pensions now a global phenomenon with renewed determination to tackle legacy liabilities

· Employers recognise they need to adopt “new paternalism” for future workplace retirement provision, but many are currently failing in this aim

The closing of defined benefit (DB) pension arrangements has become a global phenomenon with employers grappling with what to replace it with, according to new research from PwC. PwC surveyed 114 Fortune 500 global multinationals (of which many operate within South Africa), which together employ 4.7 million people and have combined pension liabilities of $950billion, and found that only six percent wish to perpetuate DB arrangements, where the employer underwrites the costs and risks of providing workers with guaranteed pension incomes. Nine in ten are actively deploying defined contribution (DC) as their predominant workplace retirement provision, with the commensurate transfer in cost and risk from employer to employees.

Tom Winterboer, PwC Leader of Financial Services for Africa, says: “In spite of the best efforts of sponsoring employers, defined benefit pension deficits have remained stubbornly on corporate balance sheets. The size and volatility of these deficits is concerning shareholders and creditors, and is making multinationals more determined than ever to make difficult decisions and reduce the negative impact on their organisation.

“While the death of DB retirement arrangements is not a new phenomenon in the English-speaking world, it is striking how pervasive this has become globally, even in those countries with the most complex and restrictive regulatory and labour environments. Multinationals are resoundingly rejecting the open-ended financial risks of defined benefits.

“As to the future of workplace retirement provision, many employers are still grappling with what to do.  There is wide recognition that employers need to innovate to meet the needs of the new world at work.”

PwC’s survey found that the majority of multinationals (83%) are closing their DB plans to new employees with 71% also intending to freeze DB accruals for their existing employees.

This shift towards DC is prompted by the continuing financial strain and volatile impact on companies of supporting DB pension and healthcare obligations. Almost 80% of respondents said they have global retirement liabilities that exceed a third of their group’s market capitalisation. A significant percentage (88%) of companies are concerned about the risks their global DB obligations pose to their balance sheet, with 83% worried about costs, 76% about impacts on cashflows and 58% about impact to credit rating.

To address the remaining big legacy DB liabilities, half of the employers intend exploring options to offer current and former employees cash or other terms to give up legacy liabilities and 45% are actively looking to transfer liabilities to insurance companies, a big opportunity and challenge for the financial services industry.

Gert Kapp, PwC Retirement Fund Leader for Africa, says: “The study confirms that across the globe employers no longer have the motivation to perpetuate DB and there is renewed determination to take action to address the risks that legacy DB obligations pose.

“Employers are grappling with their responsibility for future benefits provision. There is little desire to take on unacceptable risks, so DC is being preferred by 9 out of 10 employers. However, at the same time there is recognition that employers have a role in helping employees to understand what they need to do to save for their retirement, and to provide for the flexibility and access to a range of retirement savings that an increasing diversified workforce demands and appreciates.”

While the appetite for providing DB pensions has largely ended, the research shows that an overwhelming majority (90%) of multinationals still want to play a significant role in the provision of retirement benefits to their employees. Companies recognise that providing retirement benefits is important to maintain their reputation as an employer of choice (93%) and to help them hire and retain the people they want (97%). But only a small number (15%) of employers feel their current benefits policy is sufficiently effective for the new world of work.

Nanie Rothman, an Associate Director in PwC’s Actuarial, Risk and Quants Division, says that although employers have no appetite to return to the costs and risks of DB, there is growing appetite to invest in “new paternalism”.  This is where companies are taking responsibility and investing resources to give employees access to appropriate retirement savings arrangements and to help them make better-informed decisions about their retirement provision.  “This is in particular relevant in South Africa where it is widely seen that retirement provision is inadequate to sustain pensioners throughout retirement. There is also a recognition that employees need to be given greater flexibility in a world of increasing diversity and unpredictability,” adds Rothman.

It is expected that many more employers will spend more time and expenses on embracing ‘new paternalism’ as part of incorporating DC within their reward strategies rather than to return to much more expensive and riskier DB arrangements. But there is still some way to go, with only 11% to 18% of companies feeling they are currently sufficiently effective at doing this.

Rothman concludes:  “Simply providing defined contribution arrangements for employees is not enough - current arrangements are delivering inadequate retirement savings and are not effective for the new world of work.
“Employers recognise that they need to do more to help employees in their retirement decisions, and that they are currently failing in this aim. Despite employers almost unanimously agreeing that education, empowerment and flexibility are essential ingredients in retirement benefits in the future, there is still a long way to go before this becomes common practice.

“We expect employers to spend more time and money embracing new paternalism as part of their reward strategies. This will be an essential step in creating retirement benefits provision that results in better outcomes for employees and employers alike, within acceptable costs and risks for the employer.”

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Sanchia  Temkin

Sanchia Temkin

Senior Manager, Media Relations, PwC South Africa

Tel: +27 (0) 11 797 4470

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