From IDS Pensions Bulletin 211, Dec/Jan 2008

Focusing on defined contribution schemes

As it becomes the norm for employers only to offer membership of defined contribution pension arrangements to new employees, a recent survey from Mercer comments that employer contributions to DC schemes, at 6.8 per cent of pay, remain too low to support employees in retirement.

The Mercer DC Survey is based on responses received from over 400 UK organisations across 18 main industry sectors which collectively sponsor over 600 defined contribution (DC) work-based pension schemes. These schemes received £740 million in combined employer and employee annual contributions and hold over £7 billion in assets.

Mercer has found that 63 per cent of all the DC schemes in the sample had been established since 2000 and that they have become the dominant form of pension provision in the private sector. Some 93 per cent of the respondents to the survey now offer membership of only a DC scheme to new employees.

The average employer contribution rate was 6.8 per cent of pensionable pay and this compared to a finding of an average of six per cent in a comparable survey undertaken five years earlier in 2002. The average employee contribution rate (but excluding voluntary contributions) was 3.6 per cent, compared to 3.3 per cent in 2002.

Overall, 35 per cent of respondents offered a flat-rate contribution structure, 38 per cent adopted a matching approach and 23 per cent operated an age-related scale – note these are not necessarily mutually exclusive. In determining the contribution rate 52 per cent of the respondents determined their contribution rate by reference to the practice of their competitors and 35 per cent targeted a specific level of benefits.

Almost all (98 per cent) of the sample provide lump sum life cover in respect of active members and among this subset 49 per cent set the amount of the cover at four times the member’s salary, reflecting the historic Revenue limit that was in place in relation to the death-in-service lump sum before 6 April 2006. In addition to the lump sum cover, 47 per cent of respondents also provide a spouse’s/civil partner’s pension on the member’s death-in-service.

Some 47 per cent of respondents provide income protection cover in the event of a member’s ill-health or disability.

What’s in IDS Pensions Bulletin 211