Defined contribution schemes continue their ascendancy, says Debi O’Donovan
The types of pension scheme on offer show how employers continue to move away from defined benefit (DB) towards defined contribution (DC) schemes. Where DB schemes still exist, they are more likely to be a secondary plan (perhaps because it is closed to new members) than the employer’s main pension scheme. Conversely, employers are far more likely to use DC schemes as their primary offering.
Almost 75% of DB schemes are final salary, but 17% are career average and 5% are hybrid. Of the 161 respondents offering a DB scheme, just 16% have it open to all staff including new joiners, while 70% have closed it to new members. One in 10 employers that still have a DB scheme as their main plan say it is closed to future accrual.
The majority (58%) of employers allow staff to make pension contributions through a salary sacrifice arrangement, thus cutting the employer’s national insurance bill. However, 42% still do not do this, perhaps because of perceived complexities or because the amounts contributed by staff are too small to warrant the extra administration.
Group personal pensions (GPP) dominate the DC pension space, perhaps because they have lower running costs than either a Sipp or trust-based scheme, but offer more bells and whistles than a stakeholder scheme.
However, when employers look to offer staff a supplementary pension plan, they go in one of two directions, opting for either a less expensive stakeholder scheme (perhaps for lower-paid staff) or a Sipp, offering more investment choices for employees who want a more sophisticated plan and are happy to pay higher charges for it.
DB schemes have changed fundamentally in recent years. Few are still open to staff outside the public sector and, given that 30% of our sample closed schemes to new members in the past year and 42% plan to close them to new accruals, their demise appears ever more imminent.
Just 39% of employers think take-up of their DC pension is as high as it should be. This is not surprising given that 23% have less than a third of their staff in a pension plan, although 33% can boast take-up levels above 80%. Most employers face a continuing challenge to boost take-up.
How much is being saved into pension plans is fundamental to what staff will one day have to live on. With auto-enrolment on its way in 2012, along with minimum contributions from employers and employees, the good news is that our sample is largely contributing more than future laws will require. The bad news is that, on average, it is way below what is going into DB schemes. This is storing up a problem for the future, when staff may be unable to afford to retire.
Almost all (83%) employers offering a DC scheme allow staff to select some form of default fund that has been put together by a pensions company or financial adviser. Nine out of 10 respondents say they understand the investment strategy behind their default fund (or funds; some employers offer more than one type), and 80% review the investment strategies and aims of the default fund offered under their main DC scheme to ensure that employees have the choice of a good investment option.
The default options on offer, and how effective they are at making employees’ pension pots grow, is crucial given the number of pension members who opt for these funds – and the employer is the gatekeeper of these funds to make sure they are up to scratch.
Although most employees opt for a default fund of some kind, it is important that they have a broad understanding of their investment choices (for example, how it relates to their tolerance for risk and how to choose a strategy for good growth), as well as whether they are investing enough to produce a decent pension in the future.
Most education appears to be passive, providing information online or in print. However, 14% of respondents bring in financial advisers or run briefings for staff (31%), both of which are proven and effective ways to educate employees.
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