More pensions uncertainty on way for British workers

Nov 28 2006 by Nic Paton Print This Article

The number of British companies offering lucrative final salary pensions to new employees has fallen from two thirds to just a fifth over the past four years and there is more uncertainty on the way.

Ominously, half of large British employers say they plan to make "significant changes" to their pension arrangements for existing employees in the next three years, a study by professional services firm Towers Perrin has found.

But a separate study by consultancy Watson Wyatt has shown that the level of contributions made by employers into cheaper defined contribution pension schemes has risne by more than a tenth over the past two years.

The Towers Perrin survey of 170 companies clearly showed the financial imperative behind the shift from final salary to defined contribution.

Whereas final salary schemes cost around 15 per cent to 20 per cent of employee pay, defined contribution was around 6.9 per cent (with employees paying some 4.5 per cent), so saving employers around two thirds of the pension cost.

"The future of corporate pensions in the UK is undoubtedly defined contribution," said Mark Duke, principal at Towers Perrin. "The cost savings are clear. The challenge going forward is to make DC work well for employees."

New pensions' legislation, financial pressures and accounting standards were the top three issues most likely to push companies into changing their retirement plans, the survey also found.

However, companies did also recognise there were wider issues than just money when it came to what pension they provided.

Half of the firms polled linked their pension to attracting key staff and improving the retention of new employees.

Of those companies planning to change their corporate pensions in the next three years, a fifth said they intended to increase their employer defined contributions payments Ė with four out of 10 prepared to pay in more than 9 per cent of pensionable salary Ė in an effort to make defined contribution pensions more attractive to employees.

"Over the next few years we will see companies lowering the value of defined benefit (final salary) commitments, increasing employee contributions, replacing employee contributions with salary sacrifice and changes to retirement ages," said Duke.

"Defined contribution is here and it is here to stay. Companies now need to focus on raising its profile with employees, making it work harder and more effectively," he added.

Echoing Towers Perrin, Watson Wyatt's poll found that the average pension contribution from FTSE-100 employers to defined contribution schemes had now increased to 9.4 per cent of an employee's pensionable salary, from 8.5 per cent in its 2004 survey.

Combining employer and employee contributions, and assuming employees took advantage of employer matching, this rose to 13.7 per cent of salary, it added.

"There is a clear trend towards newer defined contribution schemes and those that have been recently reviewed and redesigned to have higher employer contribution rates and we expect this trend to continue," agreed Gary Smith, a senior consultant at Watson Wyatt.

However the survey also found membership take-up rates varying enormously across FTSE-100 companies, an indication of employee scepticism over defined contribution pensions and the state of British retirement savings in general.

While more than half the companies had more than eight out of 10 eligible employees joining the pension scheme, some 18 per cent had take-up rates of less than a fifth of employees.

"This may be due to low levels of employee engagement and awareness," said Smith.

"There is also anecdotal evidence of a correlation between low take up rates and a high proportion of female employees, part-time workers and/or high levels of turnover," he added.

Employers were increasingly using automatic enrolment, whereby employers have to decide to 'opt-out' rather than be required to complete and return an application form in order to join the scheme.

"There is a clear trend for lower take up rates for companies without automatic enrolment," Smith concluded.