Pensions World

The gulf between private and public sector pensions is set to widen. While over 5m public sector employees enjoy open defined benefit (DB) pension schemes, fewer than 2m private sector employees remain in largely closed DB schemes, according to the Association of Consulting Actuaries (ACA) latest Pension Trends survey.

Other key survey findings are:

Nine out of ten private sector DB schemes are now closed to new entrants and four out of ten closed to future accrual (half of these closing in the past year alone).

A quarter (25%) of private sector employers are now looking to buy out (or buy in) all their DB scheme liabilities in the next five years, rising to 40% within a decade.

Only just over a quarter of employers have budgeted for the cost of workplace pension auto-enrolment which begins in stages from October 2012.

While around three-quarters of employers say they are likely to auto-enrol all employees into their existing workplace pension scheme(s), 27% say they are likely to review their existing pension benefits to mitigate the cost of higher membership.

In all three areas of investment, longevity and inflation risk, at least half of the employers responding to the survey say that employers should share or take on a majority of these pension risks.

A clear majority of employers currently operating defined contribution (DC) schemes are presently reluctant to move to large, multi-employer schemes.

Few small employers are in a position to level down pension provision as most offer no workplace pensions at present; the survey found a third of larger employers are considering such a move.

Overall, a fifth of employers are looking to decrease their pension spend, balanced by 14% aiming to increase spend. A third of larger employers say they are looking to decrease their spending on pensions.

Opt outs increasing

Over the past three years, 21% of employers report that member opt outs from workplace pension schemes have increased.

Employers responding to the survey report average contributions into DC schemes have changed very little over the past decade – contribution rates are generally failing to keep pace with the pension costs of longer lifespans and lower investment returns.

Despite a near doubling in employer pension contributions over the past decade, close to a third of employers (31%) expect to take over ten years to remove their DB scheme deficits.

Only just over a quarter of employers (26%) say they have budgeted for the costs of auto-enrolment, with this falling to one in seven among employers with 49 or fewer employees. On average, budgets are based on estimates of 25% of employees opting out of workplace pensions following auto-enrolment, but with smaller employers estimating between 30–40% of employees will decide to opt out.

Whereas, at present, over nine out of ten employers say their employees retire at age 65 or younger, in under a decade close to four out of ten employers expect the typical retirement age to be 67 or later. One in six employers expects typical retirement ages to move out to between age 68 to 70 by 2020.

Upwards of eight out of ten private sector employers support the recommendations made by Lord Hutton that public service pensions should be scaled back (85%), that member contributions should increase (79%) and that the pension age in such schemes should increase to the state pension age (91%).

Commenting on the survey results, ACA chairman, Stuart Southall, said: “Auto-enrolment, beginning in late 2012, should widen private sector pension coverage, particularly where no pensions are offered at present, but the fact that recently the government had to delay its introduction for smaller employers, because of the deteriorating economic climate, is discouraging.” 

www.aca.org.uk