Article date: 9 May 2002
New research from Norwich Union suggests that recent closures ofdefined benefit schemes are likely to increase over the next twoyears, with a marked acceleration in the number of outrightclosures affecting employees of larger private sectorcompanies.
The research found evidence of declining employer commitment tooccupational pension schemes.
Norwich Union believes radical thinking is needed to halt thistrend; for the vast majority of people, providing a meaningfulpension at retirement without significant employer contributions isimpossible.
The key points from the research are as follows:
Closure of defined benefit schemes to existingmembers
- 11 per cent of private sector employers say that it is likelythey will close outright their defined benefit schemes to both newand existing members in the next two years, compared to only 4 percent who say they have done so in the last two years.
Closure of defined benefit schemes to newemployees
- 23 per cent of private sector employers with defined benefitschemes say it is likely that they will close them to newemployees in the next two years, whilst a further 23 per cent saythat this action has been taken within the last two years.
- Almost one in four employers contributing in excess of 10 percent (of salary) to a defined benefit scheme consider it likelythat they will close their scheme to new employees over the nexttwo years.
- According to respondents, the average employer contribution tomoney purchase or defined contribution schemes is 5.8 per cent,significantly lower than the average of 11.0 per cent for definedbenefit schemes*.
- According to respondents, the average employer contribution toStakeholder schemes is 3.7 per cent.
Responsibility for avoiding pensionsshortfalls
- When asked which combination(s) of employee, Government oremployer should be responsible for helping employees avoid a majorshortfall in income in retirement, 74 per cent of employersconsider this to be the role of Government and employees, notemployers.
Norwich Union believes that radical thinking is now needed tohalt the trend of declining employer commitment to occupationalpension schemes.
To help tackle the issue, three key ideas - which Norwich Unionsupports in principle - are to be researched by the insurer, andthe findings from these will then be fed in to Government:
- The Government to introduce a system of tax credits foremployers, dependent on the employer's financial commitment to apension scheme or the level of employee take-up.
This would have an obvious benefit in incentivising pensioncontributions, but it could also have wider economic benefits byshifting the balance between the importance of pensions benefitscompared to salaries, putting downward pressure on salary rises(and, therefore, inflation too), as well as pushing monies awayfrom consumers and onto the stockmarket.
- The Government to otherwise adjust the tax system so thatthere is more of a taxation incentive for employers to make apension contribution than increase employee salaries.
This would have a similar economic impact as suggestion 1.(above).
- The Government to introduce a programme of education with theaim of creating a real understanding of the importance of pensionprovision at an early age.
The objective is that employees recognise the value of aquality pension scheme as well as a competitivesalary.Norwich Union believes that employer commitment topensions would increase if employees demanded it. Currently, 56per cent of employers say their employees do not take thecompany's pension contribution into account when consideringtheir earnings.
Commenting, Iain Oliver, head of corporate pensions at NorwichUnion, said: "During the last twelve months a growing number ofwell known large private sector companies have decided to closetheir final salary schemes to new employees, and some to theirexisting employees as well, which is a much more significantstep.
"We anticipate that this trend will continue into the non-plcbusiness sectors. We also expect an increasing number of schemes tobe closed for existing as well as for new members.
"The Government will not make serious inroads into the so called'savings gap' unless it can persuade private sector employers tooffer a significant financial commitment to their pensionschemes.
"Radical thinking is needed to incentivise employers of allsizes into direct action."
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Notes to editors
The research was carried out exclusively for Norwich Union bySimpson Carpenter Limited - by telephone interviewing of 1,003employers between 20 March 2002 and 16 April 2002.
The target respondent was the company Pensions Manager (forlarger employers) and the owner/Chief Executive/Finance Director(for smaller employers).
The samples were drawn from the membership of the NationalAssociation of Pension Funds (NAPF) and from Dun & Bradstreet(for the smaller employers). The sample was quota controlled bysize and sector as follows:
|NUMBER OF EMPLOYEES||SERVICE SECTOR||MANUFACTURING SECTOR||TOTAL|
|More than 250||180||74||254|
Of these 1,003 employers, a total of 363 offered defined benefitschemes.
Background to decline in defined benefitschemes
Government pension policy is heavily reliant on the principle ofemployer involvement in pension provision, both from the point ofview of providing employees with access and contributing to theirschemes.
Historically, most large employers have provided "definedbenefit" schemes (also known as final salary schemes), whichguarantee a certain level of pension at retirement and are financedby variable employer contributions depending on the relationshipbetween scheme assets and liabilities.
Defined benefit pension schemes, particularly those offered bythe largest organisations, are currently in a state of nervousnessdue to increasing financial pressures.
This has been caused by:
- Volatile equity markets, which have significantly reduced thevalue of scheme assets. Anticipated future investment growth isalso lower than before.
- the fact that people now live longer in retirement andinterest rates are currently at a low level, which thereforeincreases the cost of pensions,
- significant regulatory and tax change over the years, bringingincreased costs for employers,
- the introduction of new accounting practices which have theeffect of making scheme liabilities transparent to shareholders(FRS17).
As a result, a number of larger companies have reined back theircommitment to defined benefit schemes.
Independent research by financial services consultants Oliver,Wyman and Company calculated that there is an annual savings gap inthe UK - between what people are and should be saving - of £27bn,with those on lower incomes most in need of saving more.
* This average excludes employers taking a temporarycontribution holiday on their defined benefit scheme.
Norwich Union is the UK's largest insurer. It is the UK'slargest provider of life, pensions and investment products and oneof the leading IFA providers. IFAs provide around 75% of thecompany's long-term savings business.
Norwich Union has strategic alliances with over 20 buildingsocieties and other leading UK brand names including Tesco PersonalFinance Limited and The Royal Bank of Scotland Group.
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