Pensions divide threatens 'genuine crisis'


The UK is fast becoming a divided nation, with public sector workers and a diminishing number of private sector employees enjoying good pensions linked to their final salaries while millions of others have no choice but to opt for riskier stock market-linked schemes.

The gradual emergence of this 'two-tier' pensions system has been highlighted by figures released by the Association of Consulting Actuaries (ACA).

Millions of employees in firms employing less than 250 people have seen their final-salary pension schemes axed over the past two years, the ACA says, and by the end of this year nine out of ten firms with fewer than 250 staff that offer a pension scheme will have reviewed their arrangements.

These firms make up the largest part of the UK economy, making up 91 percent of UK enterprises, employing 55.6 percent of the working population - more than 14m people - and generating 52 percent of business turnover.

Of those that offer pension arrangements, only a third of defined benefit schemes (i.e. pensions that offer a fixed proportion of final salary) remain open to new staff because many have closed their doors in the last two years due to rising costs. The trend mirrors that in many bigger companies.

The survey of 459 firms carried out for the ACA’s fourth biennial survey of pension trends found signs that an increasing number of smaller firms are switching to lower cost Group Personal Pensions (GPP) and Stakeholder schemes – often with no employer contribution – and away from trust based occupational defined contribution schemes.

Some 44 percent of firms offer such arrangements, with a quarter offering only a GPP scheme.

But the research found that employers contribute far less into GPP and stakeholder schemes than they do into defined benefit schemes. Contributions into defined benefit schemes average close to three times those made by firms into defined contribution and GPP schemes, and six times those into Stakeholder schemes.

It is usually left to the employee to fund the difference, but most are unable or unwilling to do so.

Employer contributions into stakeholder pensions is particularly low. On average, employers save only 2.4 percent of an employee's salary into these schemes compared with 15.8 percent into a final-salary scheme.

As result, these schemes offer much lower pensions. A typical defined contribution scheme offers just 19 percent of final salary on retirement and a stakeholder scheme just 10 percent of final salary

The firms surveyed said that the ‘bad press’ given to pensions over the last two years, largely due to the effects of falling investment returns and demographic changes, has undermined the promotion of pension saving and has undermined the perceived value of schemes or setting up schemes.

However, this ‘bad press’ has largely left interest in pensions at a low level (14 percent) in firms not offering a scheme, as against the situation in firms offering a pension scheme, where 60 percent report greater interest.

Gordon Pollock, chairman of the Association of Consulting Actuaries, said: "My concern is that contributions into these schemes are worryingly low. The danger of a divided nation with public sector workers and a diminishing number of private sector workers enjoying good pensions, set against millions of people with poor pensions, is fast becoming a reality within a generation.

"I don't think the Government has yet grasped the enormity of the political issue or the imaginative responses needed to address what is a genuine pensions crisis."