The ONS has produced a revealing chart that the FT has improved. It shows that while employers are putting more into auto-enrolled workplace pensions, they are putting less into Defined Benefit pensions for a number of reasons (none of them very obvious to the ordinary person).
Willis Tower Watson’s research among large companies does not show their level of contributions to workplace pensions have increased, the increases reflect wage inflation to which defined contributions are linked.
The contributions into DB plans has fallen because actuaries have estimated the cost of meeting pension promises has fallen as existing gilt holdings can better meet the pension payments of the future while what little remains of investment in pension schemes, has done relatively well. Add to this the fact that few pension schemes are taking on new liabilities and that pensioners eventually die and DB scheme might be considered “manageable”.
You can see the collapse in employer contributions into DB as the long awaited release from calls from actuaries and behind them the pension regulator is loosening.
My friends Con Keating and Iain Clacher may question the measurement of liabilities where TPR, PPF and ONS have different estimates, but no-one can question the radical fall in contributions in DB contributions (dark blue) and recognise that DC contributions are linked to wage inflation.
We may have given up on pensions as a measure of employee benefits but there has been no alternative source of retirement income to occupational or “worker” pension in the meantime. Steve Webb tells the FT
“If the era of large employer contributions is over and in real terms far less is going into pensions as a whole, then we are storing up problems for tomorrow,”
Well perhaps; but perhaps we ought to be focussing adequacy less on employer contributions (which now include much higher national insurance payments) and more on the replacement of lost retirement income from defined benefit schemes (closed for future pension build up).
IMO we will start seeing pensions as more than a perk , when staff call them out as deferred pay and this is not going to happen so long as we run down DB and give people freedom from pensions with their DC savings. Requiring employers to pay into people’s pots is not like getting them to pay deferred pay, it works well for a pension industry coining it through annual management charges but it is not doing it for employers.
The Government does not seem to see reversing falling pension contributions as a priority either. It is clearly keen to see pension scheme supplying pensions rather than ISA style “pots” and to do so by investing into the future rather than transferring what once were growth funds into corporate bonds. DC plans have yet to break away from pooled funds and those principally global equity , bonds and cash. Adequate contributions will follow once employers and staff see retirement plans as more than a “perk” but as “pensions”.
The ONS numbers tell us what we already know , that companies no longer see pensions as a corporate asset. There will be relief in corporate boardrooms to see liabilities and required contributions falling and not much inclination to invest unless a strong case can be shown them to “carry on”. There is no sign that employers get much out of DC workplace pensions nor yet a concern from members that what they were promised “a pension” is not on the horizon.
I was intrigued by one of the early comments
I am disappointed by the lack of enthusiasm for pensions amongst employers , they should not feel that deferred gratitude is a bad means of rewarding staff. They have been forced into this position by being forced to meet substantial payments demanded of them by trustees, actuaries and regulators.
We have established the phrase “employer covenant” to cover the DB demand. Add to this the cost of national insurance and the obligations to meet AE workplace demands and employers do indeed have a reason to regard pensions as taxation.
A “covenant” is a solemn and binding agreement between parties, the current payments are less “covenant” and more unwanted taxation. We need to return to covenant.
This was not how pensions were seen by previous generations of executives of large and small employers and it need not be the way they are seen in the future.
Executives will be a lot more concerned about providing reasonable pensions when the Government stops punishing them [through restricting tax relief/applying punitive tax rates] for investing their remuneration into them.
It’s been the same old story for years – the minute the scheme is no longer worthwhile for the execs, it is no longer worthwhile for the staff.
Of course, the Treasury staff, while retaining their own DB schemes which will almost certainly not cause Annual Allowance problems to many, are only quite happy to use pension contributions as a source of taxation. It is just very unfortunate that it was an issue for medical staff who have subsequently retired to avoid taxation problems (up until the LTA was removed anyway).
To correct one error – the ONS does not produce pension liability estimates.
As to the decline in contributions – deficit repair contributions have fallen from an annual high of £17.9 billion to £4.7 billion recently. Ordinary contributions have fallen from £9.8 billion in 2020 to £5.8 billion most recently.
I take two messages from the statistics:
1. Employers DC contributions cannot be varied once they have been set in employment contracts, whereas contributions into a DB scheme even where benefits are still accruing can vary (and even go down!) based on the long term investment performance of the Scheme.
2. In the period covered by the review, a substantial proportion of the total contributions into DB schemes were deficit recovery contributions. The statistics probably reflect a substantial fall in deficit recovery contributions. This flows from the overstatement of deficit recovery contributions required by Technical Provisions valuations based on historically low and indeed negative gilt yields overstating liability values and which have sucked hundreds of £Billions in unnecessary funds out of employers. It is regrettable that Members have not benefited from those contributions – the beneficiaries being the insurance companies and the advisors involved in the “risk transfer” industry. Further the employer funding a DB scheme had previously paid substantial premiums to insure by way of Pension Protection fund premiums.
This is likely to be why employers may well view pension contributions aa a tax and not as an employee benefit.