From the TUC

DC pensions are not replacing DB schemes

12 Sep 2009, by in Pensions & Investment

Other than attacks on public sector pensions, the commonest pension story in the media at the moment is news of employers closing defined benefit (DB) schemes to replace them with defined contribution (DC) schemes. (Briefly a DB scheme pays a pension based on your pay and years of service and is guaranteed by the employer, while a DC scheme is simply a savings pot with your pension depending on the contributions made and how well they are invested.)

This is undoubtedly a big story, but there is an even bigger one. I’ve been going through the ONS statistics in some detail and they show that as well as changing the type of pension on offer employers are still retreating from providing decent pensions at all.

In 2000 54.6 per cent of the private sector workforce didn’t have an employer provided pension. With the exception of a minor blip in 01 and 02 when stakeholders were introduced, the trend shows a relentless employer retreat from providing any kind of pension – and the unpensioned now make up 62.6 per cent of the private sector workforce. (And you can add one per cent to this for employer provided schemes that have zero employer contributions.)

While there has been an increase in DC coverage as employers close DB schemes, the increase has not kept up with the retreat from DB.

It’s quite hard to define what makes a quality DC scheme. But we can have a stab as for the last four years the statistics show employer contributions. A common pensions world assumption is that you need to put away 15 per cent of your earnings to build up a good pension, and it’s usually the case in quality schemes that the employer contribution is bigger than the employee.

We’ve therefore said that a good DC scheme is one with a better than 8 per cent employer contribution. It’s one of the breaks in the stats and while it will not produce the kind of pension that the closed DB schemes will, it would still be a pretty good deal for anyone without a pension.

Surprisingly there are still almost twice as many DB scheme members as there are  quality DC scheme members across the private sector.  There may be a clear trend towards DC from DB – not just from new decisions by employers but the inevitable churn in companies that closed DB schemes some time ago to new members as old staff with DB leave and new staff join the replacement DC scheme.

But no one should be under the impression that DC schemes are filling the gap left by DB schemes. In 2012 all employers will have to contribute to a pension when auto-enrolment starts, and at that point DC scheme membership will increase markedly. That is of course huge progress, but even after contributions have been phased in, employers will only have to contribute three per cent.  

These figures don’t tell us why DC scheme coverage is so poor now. It will be some combination of employers not providing DC schemes (or making new staff wait for them) and employees not taking up membership. But there can be no doubt that the employer retreat will be the main driver.

  

 

% of private sector workforce with occupational pension % with DB pension % with DC pension % DC with employer contribution % DC with employer contribution > 8% % with no pension Total private sector workers (000s)

2000

45.5

28.6

16.9

N/A

N/A

54.6

16,787

2001

45.6

27.4

18.2

N/A

N/A

54.4

17,092

2002

47.4

26.3

21.1

N/A

N/A

52.7

16,831

2003

46.1

24.3

21.8

N/A

N/A

53.9

16,749

2004

43.2

22.3

20.9

N/A

N/A

56.8

16,338

2005

38.5

18.6

19.9

18.9

6.1

59.0

16,766

2006

38.1

16.3

21.8

20.5

6.6

59.0

16,769

2007

38.2

16.2

22.0

21.0

7.0

59.0

16,790

2008

35.3

13.5

21.8

20.7

7.3

62.6

17,393

 

 

 

 

 

 

 

 

To conclude with a nerdy pensions statistical point – the DC column in this table combines the figures for traditional trust based DC schemes, stakeholder pensions and Group Personal Pensions (GPPs)- a kind of collective employer backed private pension. ASHE rightly includes all of these, but the government’s Occupational Pensions Schemes Survey uses a narrow legalistic definition of occupational pension and therefore excludes GPPs and stakeholders. That doesn’t make much sense any more.

6 Responses to DC pensions are not replacing DB schemes

  1. Mike Jones
    Sep 14th 2009, 8:58 am

    An informative blog.

    Quote: “Briefly a DB scheme pays a pension based on your pay and years of service and is guaranteed by the employer, while a DC scheme is simply a savings pot with your pension depending on the contributions made and how well they are invested.”

    It’s worth pointing out of course that sponsoring employers of defined benefit schemes PROMISE pension benefits, rather than GUARANTEE them.

    A subtle, but important difference.

    Mike Jones, Director, http://www.MyCompanyPension.co.uk

  2. Nigel Stanley

    Nigel Stanley
    Sep 14th 2009, 1:32 pm

    Mike

    You are absolutely right. A poor choice of words on my part.

    Of course the advent of the Pensions Protection Fund – thanks in large part to union campaigning – does change the balance of risk profoundly.

    But that’s no excuse!

  3. Mike Jones
    Sep 14th 2009, 2:33 pm

    Hi Nigel,

    Agreed about the PPF in that it is a welcomed safety net.

    However, it is important for members of a defined benefits scheme – and particularly those that are higher earners with long service – to realise the compensation limits that the PPF imposes and under what circumstances.

    On another note, I came across this potentially important article when reseaching our pension news updates.

    It revolves around a recent European Court of Justice ruling.

    From my perspective, I can immediately see at least one potential pension implication in this ruling – and I suspect there are quite a few other HR and non-HR issues upon which this ECJ ruling will impinge. See the headline:

    – Staff who fall sick during annual leave entitled to retake holiday

    Link: http://tinyurl.com/StaffSickness

    Mike

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    Oct 8th 2009, 3:35 pm

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  6. J P Wood
    Nov 11th 2009, 10:07 am

    Just a thought….We have seen a huge shift from schemes where the employer took responsibility for investment and longevity (the final salary scheme) to schemes where the worker has to take on the responsibility for where they chose to invest their savings and what they do with it in retirement (the modern day money purchase scheme).

    The big shift is a result of this Government’s interventions with pensions (the Brown tax raid and the PPF to name 2). Employers have been given an opportunity to almost shirk (forever) their pension responsibilities to their employees. Now, with the pending pension reforms we could actually see employers not just moving from the Gold Plated pensions to modern money purchase schemes; but moving to inadequate modern day money purchase schemes (Personal Accounts).

    We missed a huge trick here. The obvious middle ground road was a Cash Balance scheme. Picture this, an employee starts work and is given his pension pack. The pack explains that his employer will guarantee him a lump of money in retirement which he can use to provide an income for his family. The employee understands from day 1 what he’s getting in for, he knows that he doesn’t have to make investment decisions and worry about whether they will turn out to be the correct ones. The skilled pension trustees will take care of it and if it doesn’t work out the employer makes up the difference. What a relief! The cost of such a scheme is much less than the traditional final salary pension but the employer takes on the burden of investment. The benefit for the employer is that it a) costs less the conventional DB scheme and b) the risk of longevity is passed to the employee. To me, this was an obvious middle ground in which employers and employees would share the burden of retirement. Somehow, morally, this sounds correct – however we now find ourselves in a very different situation.

    We’ve potentially missed this opportunity for good; employers have been given the excuse to move from one extreme to the other. There won’t be a shift back the other way.

    Now, let’s say that employers decide to level down their pension provision as a result of the 2012 pension reforms (this will undoubtedly happen), and why not? In 2008 Mr. Employer was paying 30% into a final salary scheme and in 2012 it’s just 3% into a Qualifying Workplace Pension – big pat on the back for the FD! We now risk generations of workers being enrolled into inadequate schemes that they don’t understand, building up enough savings to take them out of means testing but not enough to provide any quality life in retirement.

    Much of the misunderstanding surrounding pensions is because there’s too much cr4p and jargon in pensions (refer to my paragraphs above to see some examples) but the key to sorting this out is not through blind enrolment but through detailed education. Government backed financial education programmes on TV after the 9 o’clock news once a week would be far more useful in the long term.

    It’s my opinion that the pension crisis is going to get a lot worse in years to come.

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