Number entering schemes isn’t reducing but contributions
need to increase
It is always interesting when the Office for National Statistics updates its Employee Workplace Pensions in the UK figures. The overall gist is overwhelmingly positive, with more people saving into pensions, which can only be a good thing in the long run.
The report is focused on those in the workplace, and workplace pensions, but it gives a real insight into the differences between types of schemes, areas of employment and sizes of employers.
Defined benefit vs defined contribution schemes
Although defined benefit schemes are supposedly on the decline, they still account for more workplace pension members than defined contribution workplace schemes.
According to the ONS’s Annual Survey of Hours and Earnings, 34 per cent of those in a workplace pension are in a DC occupational scheme and 36 per cent are in a DB occupational scheme, with the remainder in group personal pensions or stakeholder schemes.
However, when you consider the fact there is little to no difference in the structure of a personal pension (group or not) and a DC workplace scheme following pension simplification in 2006, the overall interpretation is a little different.
After taking that into account and only looking at two main types of scheme, DB pensions aren’t in the majority after all; they are, in reality, the minority schemes.
Public vs private sector
There is no doubt that those in the public sector are streets ahead when looking at pension scheme take-up. This has always been the case, mainly because pension schemes in the public sector have been seen as the best available and one of the main reasons to choose to work in this area.
Although these schemes have changed over the years, their take-up is still significantly higher than in the private sector. In 2018, 90 per cent of public sector and 72 per cent of private sector employees were actively participating in workplace pension schemes.
This difference dramatically increases for those who are part-time; 82.7 per cent of part-time employees in the public sector are in a pension scheme, whereas only 44.5 per cent of those in the private sector are members of a scheme.
This really shows a different attitude to pensions, which may well relate to the types and costs of the schemes available in different sectors. In the public sector, the pension is part of what is expected. This isn’t necessarily the case in the private sector, even with the introduction of automatic enrolment.
The gap between the two sectors has narrowed over the years, most significantly since auto-enrolment was launched.
However, the difference in the types of pension scheme offered is staggering: 93 per cent of public sector schemes are DB, whereas only 12 per cent in the private sector are in this format.
Although this isn’t surprising, when you factor in the costs of these types of schemes, you can see why significant changes to the benefits provided have been made over recent years.
Many have moved to what is seen as the cheaper and less valuable alternative to final salary schemes: career-averaged pensions.
Costs to employers
One of the most staggering statistics from this survey is that 85 per cent of those in DB pensions received contributions equivalent to 12 per cent or more of their 2018 earnings. Only 8 per cent of those in a DC pension scheme received the same.
This clearly shows the cost burden that a DB scheme can place on the employer.
These schemes might be seen by many as “gold-plated” but when they are at the detriment to the ongoing running or sale of a business, they surely aren’t the benefit to the member they once would have been.
For those private sector employers that can, it makes financial sense for many to move to a DC arrangement, to save money and try to limit their open-ended liabilities.
Pensions are still being used and those entering workplace schemes don’t appear to be reducing in number. What we need to see now is those in these vehicles, especially in DC, group personal pension and stakeholder schemes, increasing their contributions.
The rise in the auto-enrolment minimum contributions will surely help this, provided those on low earnings are supported to remain in their schemes.
Education is a good way to ensure that they don’t miss out on the employer contributions they are entitled to.
Claire Trott is head of pensions strategy at St James’s Place Group