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Closure of defined-benefit pensions can leave costly health and sickness provision shortfall

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Employers are unaware closing a defined-benefit (DB) pension scheme could have an impact on sickness provision, new research reveals.

A report from Group Risk Development (GRiD), the trade organisation for the group risk industry, indicates the knock-on effect closing a DB scheme could have on corporate sickness policy has been overlooked by as many as 25% of businesses.  And of those who understand the implications, a further 49% are still considering how they will deal with the situation.

It is estimated two thirds of open DB schemes are planning changes over the next five years, likely to result in the closure of over half of them - 1,000 schemes.  

Currently an employer operating a DB scheme may use early retirement as an option if an employee develops a condition requiring long-term absence. In the days of pension surpluses, the existence of this exit strategy frequently deterred employers from making other arrangements. But failing to make adequate sickness provision now is an extremely expensive oversight - leaving British businesses with a protection gap costing on average of £692 per employee, per year.

Katharine Moxham, spokeswoman for Group Risk Development (GRiD), said: "Closing or revising a corporate DB scheme has clear implications for corporate pension policy but it can also leave a hole in a company's health and sickness provision that shouldn't be ignored. Worryingly, our study shows that, despite recent high-profile DB closures, the majority of businesses questioned had made no attempt so far to safeguard their business from a protection shortfall this could bring."

"Even though some lower-value ill-health retirement entitlements may remain, early retirement is evidently inappropriate where there is an expectation of recovery."