A quarter of businesses do not understand how closing a defined benefit (DB) scheme has an impact on sickness provision, according to research conducted by trade organisation Group Risk Development (Grid).
The study highlighted that 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.
Grid said that failing to make adequate sickness provision now could be an expensive oversight – leaving British businesses with a protection gap costing on average of £692 per employee, per year.
The study also indicated that of those employers who understand the implications, a further 49% are still considering how they will deal with the situation.
An estimated two-thirds of open DB schemes are planning changes over the next five years likely to result in closure of over half of them – 1,000 schemes.
Katharine Moxham, spokesperson for group risk development (Grid), said: “Even though some lower value ill-health retirement entitlements may remain, early retirement is evidently inappropriate where there is an expectation of recovery. One potential solution could be to implement a group income protection (GIP) policy where employers offer staff access to insured protection cover if injury or illness prevents them from working for a prolonged period.
“The main difference between GIP and early retirement is that, under a GIP policy, individuals remain in employment so the focus is on getting them back to work as well as providing financial support for employees and their families while they are unable to work.”