A new survey of UK business leaders claims to prove that plan sponsors remain seriously committed to pensions but are genuinely concerned that poor employee take up threatens many with poverty in old age.
The survey, published on Monday by the CBI and Mercer Human Resource Consulting, takes an in-depth look at the pensions decision making of more than 230 business leaders across the country. It shows that – despite an intensive, high-profile pensions debate many employees remain ignorant or unsure about the benefits on offer and are failing to take advantage of company contributions to pension schemes.
Employees turning their backs on large sums companies make available for pensions Forty-eight per cent of employees in the survey were eligible for a defined benefit scheme and 38 per cent for a defined contribution scheme. But, while 83 per cent of those eligible joined defined benefit schemes, the figure for defined contribution schemes was only 38 per cent.
Companies are trying hard to increase pension take up among their employees. The most successful method, used by 22 per cent of firms, is automatic opt-in which achieved 93 per cent take up. Thirty per cent of companies offered either generic information or individual advice with no discernible difference Between the two approaches.
Peter Thompson, Worldwide Partner at Mercer Human Resource Consulting and immediate past Chairman of the National Association of Pension Funds, said: “For many years, workplace pension provision has been regarded as the most efficient and most suitable way for employees to save for their retirement. This survey shows that employers are still committed to providing pensions, despite claims to the contrary in some quarters.”
CBI Deputy Director- General, John Cridland, said: “The pensions issue has received enormous public attention so it’s deeply worrying that, despite the efforts of business, so many employees are failing to see beyond tomorrow and are rejecting employers’ attempts to help secure their future.”
Employers are committed to pensions and helping employees plan for retirement Ninety-six per cent of employers surveyed provided occupational schemes or contributed to individuals’ private pensions. Eighty per cent said they want to help employees plan for retirement and 73 per cent firmly believe that offering a pension scheme helps to recruit and retain staff.
The survey highlights the substantial change in the types of pensions companies now offer. Over the last two years, 41 per cent of firms running defined benefit schemes have switched to defined contribution for new employees. A further 10 per cent are expected to switch to defined contribution over the next twelve months.
Two thirds of employers have kept defined benefit schemes for existing employees, but only 24 per cent of companies now offer them to new employees – half the number of 10 years ago.
CBI Deputy Director- General, John Cridland, said: “This survey shows employers are overwhelmingly committed to pensions with almost all offering schemes or contributions. But as costs and risks have risen they are paying a huge price for that commitment, especially for defined benefit schemes.”
Asked to predict pension provision in ten years time companies were clear that defined contribution schemes will dominate. They will be the main form of pension for 60 per cent of companies.
Looking further ahead, there is growing interest in hybrid schemes a combination of defined benefit and defined contribution – which share the risk between employers and employees. Many senior executives expressed the view that future retirement savings need to be more flexible and will probably involve products such as share plans and ISAs.
CBI Deputy Director- General, John Cridland, added: “These findings indicate that a major shift may be under way from occupational pension schemes to a much more flexible range of savings products. As people live longer and retire later so the whole concept of retirement pensions will also change. Employers believe that new savings routes will be more suitable to meet employees’ evolving needs.”
Impact of increasing pension costs on companies and the UK economy Increasing life expectancy and falls in the stock market and interest rates have all played a part in making pensions more expensive. The government’s abolition of dividend tax relief and the erosion of the value of the National Insurance rebate have also had a significant impact. As a result, many employers are putting in huge amounts to make up funding shortfalls in their defined benefit schemes. The average employer contribution was 16.2 per cent but some companies were contributing between 30 and 60 per cent of payroll.
“The cost of defined benefit pension provision has risen sharply in recent years,” said Mercer’s Peter Thompson. “Many employers are having to contribute large, unplanned amounts to defined benefit schemes, which explains why so many companies have now closed them to new members.”
Those increased pension costs also threaten the long term competitiveness of UK firms as they impact on profits and investment. Half of all firms said profits had been hit and nearly a quarter had been forced to reduce investment in the business.