Defined contribution continues to dominate private sector pensions
Out of around 9.5 million active members of private sector workplace pension schemes only 1.6 million are accruing new defined benefits, and this is projected to fall to less than 1 million by 2020 as the decline of defined benefit schemes accelerates, a report by The Pensions Policy Institute, sponsored by MetLife Assurance forecasts.
The report notes the increased cost of funding a defined benefit pension, which has risen from 11% of salary in the 1950’s to 21% of salary now. The combined cost of all the risks associated with defined benefit pension scheme provision has reduced the attractiveness of providing defined benefit pensions in the private sector.
In marked contrast, active membership of private sector defined contribution schemes is projected to more than double from 6.6 million to 16 million as the launch of auto-enrolment from October 2012 transforms the provision of workplace pensions in the private sector, the report “The changing landscape of pension schemes in the private sector in the UK” says.
This fundamental transformation of the private sector pension landscape in the UK means that most of the complex and often little-understood risks associated with providing a pension (namely longevity, investment and inflation) are being transferred to future new employees.
Wayne Daniel, Chief Executive Officer at MetLife Assurance said: “The future of private sector pension provision is defined contribution and the launch of auto-enrolment in October will significantly expand membership.”
“Managing the legacy liabilities and assets of defined benefit schemes is a major issue for the pensions industry, where MetLife Assurance has a leading role to play. The industry has to work harder to explain what is happening and how employers, trustees and employees should respond. The PPI report is a major contribution to increasing understanding of the challenges facing private sector pension provision.”
Rising costs and risks for sponsoring employers and trustees of running defined benefit schemes has highlighted strategies to mitigate liabilities with risk transfer deals such as buyouts, buy-ins and longevity deals reaching around £40 billion between 2007 and 2011.
However, that represents less than 3% of total defined benefit liabilities – which the report says “may indicate that, subject to market capacity and affordability, risk transfer deals could increase in the future”.
Daniel continues: “Currently just 16% of defined benefit schemes are open to new members compared to 36% in 2007 with replacement defined contribution schemes attracting lower employer contributions”.
“Since the individual member assumes all the risk in a defined contribution scheme, it will be important that employees are helped to understand and make informed decisions about what is needed to ensure their future pension provision provides for a comfortable retirement.”