National Milk Records is leaving the U.K.’s Milk Pension Fund, a defined benefit plan with more than 15,000 members, the latest in a long line of companies moving away from schemes promising a guaranteed income in retirement.
The supplier of dairy and livestock services said Thursday that it’s planning to withdraw from the fund because the cost of honoring liabilities is hampering its ability to attract investment. The U.K.’s Milk Pension Fund has £451 million (about $582 million) of assets, according to a spokesperson.
More than 900 defined benefit schemes in the U.K. have been closed to future accrual in the past five years, according to a Pensions Policy Institute note at the end of March. Many pensions are struggling in part because bonds – the traditional go-to investment for DB pension plans – have produced low yields in recent years, vastly increasing their liabilities.
“Our liabilities to the Milk Pension Fund have been a key issue for the company,” Philip Kirkham, chairman at National Milk Records, said in the company statement. Withdrawing from the fund “will give shareholders and potential investors in the company greater clarity as to the group’s underlying performance, whilst freeing up valuable resources and management time,” he said.
National Milk Records is one of several former U.K. state-owned companies in the dairy industry that remained a member of the pension scheme after it was privatized. The company’s withdrawal, which still requires shareholder approval, will help National Milk Records grow as it focuses on rebuilding its balance sheet, according to Kirkham.
Other corporate plan sponsors of the Milk Pension Fund include Genus Breeding, Promar International, First Milk and Lloyd Fraser (Bulk Liquids).
Employers in the dairy industry have a reputation for being quite “paternalistic,” but the financial burden of a DB scheme can be “pretty huge,” according to Lydia Fearn, head of defined contribution and financial wellbeing at U.K. pension consultant Redington.
“While companies need to do something today for their balance sheets, they also need to think about the unintended consequences of removing a DB liability from the balance sheet,” she said. They should consider “what state their employees are going to be in when it comes to retirement.”
Companies have been moving away from expensive defined benefit plans in favor of define contribution plans that don’t guarantee a level of income in retirement.
Royal Mail, which wants to change its pension scheme to a DC plan, announced last month that costs next year would be more than double the DB plan’s current contributions. In March, Tata Steel U.K. said it would be closing the British Steel pension scheme to future accrual, replacing it with a defined contribution alternative. And in October, the Financial Times reported that industrial giant Honeywell planned to close its U.K. DB scheme.
