31 January 2006
Private sector pensions don't meet Pensions Commission standard
Most employers in the private sector are failing to enrol employees automatically into their occupational pension schemes - a key element of the Pensions Commission's prescription for solving the UK's pensions crisis - according to a new survey by the Labour Research Department (LRD).
In its second report, published last November, the Pensions Commission called for a new National Pensions Savings Scheme (NPSS), a low-cost savings vehicle based on the "money-purchase" pension model. In order to boost participation in occupational pensions, the Commission's proposals would require employers to enrol all their employees automatically into the NPSS or a superior scheme.
But the LRD's survey of union representatives in 100 private sector workplaces, carried out in December and January, found that automatic enrolment of new employees is current practice in just 14% of workplaces operating money-purchase (or "defined contribution") pension schemes - compared with almost half of workplaces with final-salary or other "defined benefit" occupational schemes that are open to new members.
Overall, employees are enrolled automatically into pension schemes at 23 of the 100 workplaces surveyed. And many schemes offering only voluntary enrolment require a qualifying period of service before new employees can join - three years in one case.
?2Money-purchase schemes in the ascendant
The survey seems to confirm that money-purchase schemes are becoming the private sector's commonest form of open occupational pension scheme, even in workplaces where trade unions are recognised.
Money-purchase schemes (including stakeholder schemes) to which the employer contributes are now offered in 57 of the 100 workplaces surveyed. Final-salary schemes are still open to new members in just 32 workplaces, while 55 have final-salary schemes that are now closed to new members.
The pattern of a closed-to-new-members final-salary scheme alongside a money-purchase scheme for new staff is seen in one-third (33) of the workplaces surveyed. "Empty shell" stakeholder schemes involving no employer contribution are offered in a further 22 workplaces.
Almost three-quarters of the union representatives surveyed said there had recently been actual or proposed changes to their occupational pension schemes, usually relating to final-salary schemes. Fifteen said their final-salary schemes had been closed - either to new members or to future contributions from existing members - or were facing closure, with money-purchase schemes being set up in their place.
Other employers are keeping their final-salary schemes open by scaling back pension benefits (reducing the benefit accrual rate from 1/60th to 1/80th, for example) or raising employees' contributions. One has changed its method of calculating benefits, basing the figure on career average earnings rather than final salary.
The Pensions Commission's "default" level of annual contributions to the proposed NPSS is 8% of salary - 5% from the employee (of which 1% would effectively be paid for by tax relief) and 3% from the employer. Employers could not opt out of the NPSS unless their own pension schemes' overall benefits and contributions were at least as good.
The LRD survey found that employers' contributions to their existing money-purchase schemes tend to exceed this 3% minimum, but are not much higher in many cases; the figures reported ranged from 2% to 10%. Employer contributions to final-salary schemes - even in workplaces where both types of scheme are provided - are generally considerably higher.
"The default level could provide a new 'floor' for negotiations in workplaces where employer contributions are low," said LRD researcher Lewis Emery. "And the Commission's proposed 'contributions cap' of ?3,000 - representing 16% of median workers' earnings - could become a useful negotiating target for unions."
Twenty workplaces in the survey have normal or effective retirement ages of below 65 for both men and women, and another 18 have a standard retirement age of 65 but allow employees to retire earlier on a full or reduced pension. This finding challenges the popular view that employees in the public sector have unduly generous provisions on retirement age.
But private sector retirement ages may soon be on the increase, for two reasons: firstly, the Pensions Commission's proposal to raise the state pension age could encourage employers to follow suit in their occupational schemes; and secondly, the move towards money-purchase schemes is giving employees an incentive to work longer, because the size of their pension annuity under such schemes will depend on their age and life expectancy on retirement.
Notes for editors
1. The survey's findings are published in full in the current issue of LRD's magazine Workplace Report.
2. "Defined benefit" pension schemes guarantee members a specific level of benefit on retirement. The most common are final-salary schemes, with benefits based on length of service and salary on retirement, although other measures such as career average earnings are also used. "Defined contribution" or money-purchase schemes invest pension contributions into a fund, with the value of the pension benefit at retirement varying according to the fund's performance.
3. The second report of the government's Pensions Commission, chaired by Lord Turner, is available at www.pensionscommission.org.uk/publications/2005/annrep/annrep-index.asp
4. Workplace Report is a monthly magazine published by the Labour Research Department, an independent trade union and labour movement research organisation founded 94 years ago. More than 1,800 trade union organisations, including 55 national unions representing 99% of total TUC membership, are affiliated.
5. For further information, contact Lewis Emery on 020 7902 9807 or Jeremy Pinel on 020 7902 9813.