The shift from defined benefit to defined contribution plans continues, and more employers prepare to introduce auto-enrolment, says Tom Washington
Rising costs have seen the shift from defined benefit (DB) to defined contribution (DC) pension schemes gather pace. Some 87% now offer a DC plan to some or all staff, compared to 75% last year and 73% in 2007. And 78% of these offer a DC plan as their main scheme.
DB schemes were offered by 60% in 2000, but only 47% this year. But the demise of DB plans may not be as swift as is often suggested. There is evidence of a phasing-out period, as DB is a secondary scheme in half of those cases.
GPPs remain the most common DC scheme, with the percentage of employers offering one standing between 51% and 54% since 2005.
After reaching a peak in 2007 (37%), the popularity of stakeholder plans has declined. Last year, 32% offered a stakeholder plan, compared to 27% now, as employers look to 2012’s pension reforms, which have been tipped to lead to the demise of such schemes.
Employers still operating a DB scheme that is open to future accrual are likely to have seen deficits rise in the downturn and have made cutbacks. One in 10 schemes are closed to future accrual, compared with 1% in 2004.
Five years ago, when more than half (53%) of respondents still offered some form of DB scheme, 30% were closed to new members. This figure now stands at 73% as employers have increasingly sought to cut costs.
Beside wholesale closure of their schemes, employers appear to be considering other prudent steps towards DB sustainability, such as increasing employee contributions.
Closing to future accrual is becoming an increasingly common solution, with 14% intending to do so in the next 12 months, compared with just 2% last year and 3% in 2007.
Only 3% are planning to close their scheme to new members, but this may be because so many have done so already. Almost half (48%) had done so in 2004, while 63% had by 2007.
Take-up of DC schemes varies according to sector. For example, a third of financial services firms, which tend to offer generous employer contributions, have achieved 100% take-up.
Just under two-thirds (65%) of respondents do not believe take-up of their DC scheme is as high as it should be. This is up from 58% last year and could be because staff are unwilling to part with their income during a recession.
Almost half (49%) seem set to implementing auto-enrolment for certain groups of employees, such as new starters, as a precursor to 2012’s pension reforms, which will make it compulsory. Moving to auto-enrolment ahead of time will spread the extra financial burden the legislation will bring.
Overall, the proportion of respondents looking to take action to increase pensions take-up is down year on year. Some employers may opt to take a less proactive approach to boosting take-up to avoid an increase in costs in the current economic climate.
The proportion of employers that take advantage of tax and national insurance savings by offering a salary sacrifice arrangement around pensions continues to grow steadily. Two years ago, 29% offered such a scheme, compared with 48% in 2008 and 49% this year.
Of those that do, 42% use the savings to make additional contributions for employees, compared with 31% two years ago, indicating that employers are being more generous.
Almost one-third (32%) use the savings elsewhere in their organisation. This compares with just 5% in 2007, suggesting this has become an important resource for employers as cashflow has suffered during the economic difficulties of recent years.
Click on the links below for more sections:
Pensions research: about the respondents; key findings
Pensions research: Attitudes to pensions
Pensions research: Pensions legislation