Data analysis: Employer contribution rates are on the rise in defined contribution schemes but are still significantly lower than defined benefit employer contributions, according to data from the Office for National Statistics.
The data also show a marked difference in employee contributions, with DB higher than that of DC. This comes as the industry calls for employers and scheme members to increase contribution rates to secure a reasonable retirement income.
The most recent ONS data show that in 2011 the average employer contribution rate for DB schemes was 14.2 per cent, compared with 6.6 per cent for DC schemes.
“There is a huge difference in employer contribution between DB and DC,” said David Knight from the ONS pensions analysis unit.
Employer contributions in DB schemes have decreased since 2009, with contributions moving from 16.5 per cent to 14.2 per cent. Clive Fortes, partner and head of corporate consulting at Hymans Robertson, said this decrease is probably due to an attempt by employers to stabilise contribution rates. The only thing that has stopped increases in these figures are companies’ attempts to control their DB pension costs.
He added: “This data pre-date the fall in bond yields. If we ran this through to 2013 and companies had done nothing to react to increasing costs, we might find costs going up to 17-18 per cent.”
There is some evidence of a rise in employer contribution rates for DC schemes. Fortes said this is a gradual increase at the “core” of DC.
“But I think we will see a reversal of that trend at a high level. The reason for that is employers are now putting in the statutory minimum as auto-enrolment contributions, which will bring the averages down,” he said.
This will lead to the “have and have-nots – those that are in minimum-contribution schemes and those that are in old-fashioned DC schemes”, Fortes added. However, this is expected to change over time as the government increases minimum contribution levels.
The data also show that in 2011, the average DB employee contribution rate was 4.9 per cent of salary whereas the average rate in DC was 2.8 per cent.
This will lead to the have and have-nots – those that are in minimum-contribution schemes and those that are in old-fashioned DC schemes
In the same year, nearly six out of 10 active DB members made contributions of 6 per cent and more, compared with around one in 10 DC members.
In DB schemes, there was an increase in the proportion of employees that contributed between 5 and 6 per cent of salary, and a decrease in those that contributed 6 per cent and over. In DC, there was an increase in those that contributed between 2 and 3 per cent, 5 and 6 per cent and more than 6 per cent.
Ideal level of contributions
A recent Scottish Widows survey found that nearly half of Britons were not saving adequately for retirement. It is recommended that employees save at least 12 per cent of their income to be properly prepared.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said the consequence of this level of contribution is that millions of people will have to work into their seventies to be able to afford retirement.
“All DC members should be shown what their contributions are likely to buy them in the way of a retirement income. This pension projection should be updated regularly and members should be encouraged to engage with retirement planning,” he added.
The ONS data also found that in 2011 there were 8.2m active members of occupational pension schemes, the lowest since the 1950s.
There has been a stark change in pension scheme membership over recent years. Employee membership of DB pensions fell to 8 per cent in 2012 from 34 per cent in 1997.
While membership of group personal schemes increased from 1 per cent to 14 per cent in 2012, this is mainly due to changes in law and regulation, said Knight.
The data also showed a divide between pension provisions for public and private sector employees. “Broadly, for every one person in a private sector DB scheme, there are three in a public sector scheme,” said Fortes.
In the same year, six in 10 active DB members contributed 6 per cent and above, compared with around one in 10 DC members.
In DB schemes, there was an increase in the proportion of employees that contributed between 5 and 6 per cent of salary, and a decrease in those that contributed 6 per cent and over. In DC, there was an increase in those that contributed between 2 and 3 per cent, 5 and 6 per cent and more than 6 per cent.
