From IDS Pensions Bulletin 212, February 2008

Employer contributions fall from previous all-time peak

Office of National Statistics figures show that in the year ending 31 March 2006 total employer contributions to self-administered occupational pension schemes increased year-on-year by a hefty 34.4 per cent. The comparable figure as at 31 March 2007 is a year-on-year decrease of 10.5 per cent.

Overview

Last year we reported that the ONS figures showed that employer contributions in the year ending 31 December 2005 had risen overall in comparison to the previous year by 23 per cent. This increase was the overall result of a 16.3 per cent increase in employer normal contributions and a 38.2 per cent increase in special contributions paid by employers in the most part to rectify actuarial deficits in their defined benefit schemes. One year later the ONS data show that year-on-year total amount of employer contributions paid in the twelve months ending 31 December 2006 had risen by a further 11 per cent (made up of a 4.8 per cent year-on-year increase in normal contributions and a 22.6 per cent year-on-year increase in special contributions).

The ONS figures show a starker contrast, however, when the value of employer contributions over the year ending 31 March 2006 is compared to this value for the year ending 31 March 2007. Last year the ONS data showed that employer contributions in the year ending 31 March 2006 had recorded an overall increase of 34.4 per cent – this being the result of a year-on-year increase of 14.5 per cent in normal contributions made by the employer and a whopping 79.4 per cent increase in special contributions. However, in the year ending 31 March 2007 both normal and special contributions had declined compared to the amounts paid in the previous year. Normal contributions declined by 1.8 per cent and special contributions declined by 23.0 per cent, resulting in an overall decline in the quantum of employer contributions of 10.5 per cent.

Examples of practice

The IDS Pensions team has looked at examples of recent employer contributions levels in 80 defined benefit schemes for scheme years ending during the period from June 2006 to April 2007. The examples showed enormous variations in contributions year-on-year. The largest year-on-year increase (excluding where a complete contribution holiday had ended) was 572.2 per cent and the largest decrease was 98.1 per cent. Such large year-on-year variations are generally the result of the payment in on year by the employer of a special contribution made to reduce or eliminate a funding deficit. Reduction of fund deficits has become even more of a priority since the introduction of the risk-based Pension Protection Fund levy: the greater the underfunding, the higher the levy premium.

A further striking feature revealed by the example data is the preponderance of defined benefit schemes where the active members represent less than ten per cent of the total scheme membership. This was the case for 26 of the 80 schemes looked at. Such schemes can reasonably be classified as ‘super-mature’.

Overall, 30 of the 80 defined benefit schemes (including DB sections of an occupational pension scheme) remained generally open to new entrants. All the remainder were generally closed to new entrants (although two of these schemes could accept new members on a discretionary basis). Furthermore two schemes which had been closed to new entrants are also now closed to further accrual of benefits whereby all the active members have become either deferred pensioners or pensioners.

What’s in IDS Pensions Bulletin 212