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Gulf between private and public sector pensions grows

Wednesday 4th January 2012

More than five million public sector employees enjoy "open" defined benefit pension schemes, with fewer than two million private sector employees now in largely "closed" schemes.

With five million public sector employees being offered pensions "far better than people in the private sector" in the latest public service pension negotiations, key findings of the final report of the 2011 Pensions trends survey, conducted by the Association of Consulting Actuaries, suggest the gulf between private and public sector pensions is set to grow in a tough economic climate.

This has prompted the ACA to call for the Government's promised paper in the New Year on "reinvigoration workplace pensions" to be bold.

Key ACA survey findings are:

* Nine out of ten private sector defined benefit schemes are now closed to new entrants and four out of ten closed to future accrual (half of these closing in the last year alone);
* 25% of private sector employers are now looking to buy-out (or buy-in) all their defined benefit scheme liabilities in the next five years, rising to 40% within a decade;
* Only just over a quarter of employers have budgeted for the cost of workplace pension auto-enrolment which begins in stages from October 2012;
* While around three-quarters of employers say they are likely to auto-enrol all employees into their existing workplace pension scheme(s), 27% say they are likely to review their existing pension benefits to mitigate the cost of higher scheme membership;
* In all three areas of investment, longevity and inflation risk, at least half of the employers responding to the survey say that employers should share or take on a majority of these pension risks;
* A clear majority of employers currently operating defined contribution schemes are presently reluctant to move to large, multi-employer schemes.

While the ACA survey report notes that few small employers are in a position to level-down pension provision as most offer no workplace pensions at present, the survey found a third of larger employers are considering such a move. The worsening economic climate since the summer has heightened employer concerns over rising pension costs.  

Other survey highlights:

* Overall, a fifth of employers are looking to decrease their pension spend, balanced by 14% aiming to increase spend.  A third of larger employers say they are looking to decrease their spending on pensions;
* Over the last three years, 21% of employers report that member opt-outs from workplace pension schemes have increased;
* Employers responding to the survey report average contributions into defined contribution schemes have changed very little over the last decade - contribution rates are generally failing to keep pace with the pension costs of longer life-spans and lower investment returns;
* Despite a near doubling in employer pension contributions over the last decade, close to a third of employers (31%) expect to take over ten years to remove their defined benefit scheme deficits;
* Only just over a quarter of employers (26%) say they have budgeted for the costs of auto-enrolment, with this falling to one in seven among employers with 49 or fewer employees.  On average, budgets are based on estimates of 25% of employees opting-out of workplace pensions following auto-enrolment, but with smaller employers estimating between 30-40% of employees will decide to opt-out;
* Whereas, at present, over nine out of ten employers say their employees retire at age 65 or younger, in under a decade close to four out of ten employers expect the typical retirement age to be 67 or later.  One in six employers expect typical retirement ages to move out to between age 68 to 70 by 2020;
* Upwards of eight out of ten private sector employers support the recommendations made by Lord Hutton that public service pensions should be scaled back (85%), that member contributions should increase (79%) and that the pension age in such schemes should increase to the State Pension Age (91%).

ACA Chairman, Stuart Southall said: "Auto-enrolment, beginning in late 2012, should widen private sector pension coverage, particularly where no pensions are offered at present, but the fact that recently the Government had to delay its introduction for smaller employers, because of the deteriorating economic climate, is discouraging.  

"Set against this, the Government is at last waking up to the reality of how low morale is in the private sector pensions world and we understand it is looking to produce a paper in the New Year examining how workplace pensions can be 'reinvigorated'. The preparedness of some employers to share risks, echoed by our survey, and the endorsement of this approach by the recent Workplace Retirement Income Commission, needs to be followed up with some urgency as part of this reinvigoration agenda.

"However, it is very difficult to see what can be done to turn the tide in the near-term given the austerity backcloth, coupled with the economic woes we are likely to face for a number of years to come."

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Mike Jones

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