Company reviews defined benefits scheme’s future as costs of plugging deficit rise
AXA UK is in the process of reviewing the future of its £3.3bn defined benefits (DB) pension scheme.
According to Pensions Week, the DB portion of the AXA UK group pension scheme has a deficit of more than £1bn.
The magazine said AXA had estimated the annual cost of tackling the deficit would be £137m by 2022 and so would require half the company’s available profit.
AXA UK confirmed in a statement that the DB scheme is under review.
The statement said: “We have communicated with all members of the defined benefits scheme and have met with employee representatives to discuss all options available as part of this review and to ensure that we fully understand the views and opinions of those involved.
“In recognition of our colleagues’ desire to continue discussions about the future of this scheme, we have extended this initial period by one month, until the middle of April, in order to give us the time to fully engage with our employee representatives.”
AXA added that when the initial discussions draw to a close at the end of April, it will begin the formal 60-day consultation process required by law.
The statement said: “We will continue to listen to our colleagues and their representatives and seek an appropriate conclusion to this review in due course.”
DB schemes, also known as final salary schemes, pay the employee an agreed amount each month from retirement until death.
They have been a thorn in the sides of insurers and other companies because a combination of longer life expectancies and weak investment performance has created deficits in the schemes. These shortfalls have to made up from profits.
They can also complicate mergers and acquisitions as many buyers of companies do not want to take on DB scheme liabilities. Groupama assumed the DB scheme of its UK insurance arm before the sale to Ageas UK, and IAG was forced to retain the pension scheme of its UK motor insurer Equity Red Star when it was sold to private equity house Aquiline at the end of 2012.
A common solution has been to close the DB schemes and replace them with defined contribution (DC) schemes, where companies pay a set amount into the employee’s pension pot before retirement. Under DC schemes, the risk of the money running out lies with the employee, not the company.
Aviva, for example, closed its DB scheme on 31 March 2011.
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