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Employees are increasing their pension contributions


Employee contributions to UK occupational pension schemes are on average increasing, according to a survey by Watson Wyatt, the actuarial, benefits and human resources consulting firm.

For survey respondents that have changed contribution rates since Watson Wyatt's 1998 survey, the average employee contribution rate has risen from 4% to 5%.

While increasing member contributions are associated with the trend towards defined contribution (DC) plans, defined benefit (DB) schemes still dominate major employers' pension provision in the UK; 82% of organisations in the survey have some form of open DB plan. Greater choice and flexibility are being built into all types of pension arrangements.

Colin Singer, a partner at Watson Wyatt, said: "Our survey shows that, while some organisations have made significant reductions in pension benefit levels, the overall position is perhaps more stable in plan design and overall benefits than some may expect. Defined benefit plans still dominate and defined contribution plans are growing only slowly. But the future remains uncertain."

The move to DC plans is often accompanied by a change in contracting-out status. Typically, there is a move from a contracted-out final salary plan to a contracted-in DC arrangement. Only a quarter of DC plans that are not contracted-out make a group personal pension plan available for the purpose of contracting-out. The overwhelming majority (over 90%) of organisations surveyed think that their plans are unlikely to change contracting-out status following the review of the terms for contracting-out. However, the detailed financial terms of contracting-out are not yet available, and it is still possible that many organisations will review contracting-out when these terms are published early in 2001.

Most respondents do not expect to designate a stakeholder pension arrangement. However, the survey pre-dated the Government's announcement on concurrency and this might change organisations' approaches. The overall average contribution rate to DC plans is approximately 10%, allowing for full matched contributions to be paid, or 8% if only minimum contributions are included. This might build to between 15% and 16% when the average effect of higher NI contributions for DC plans that are contracted-in and risk benefits are allowed for. Our calculations indicate that the pension that may emerge from the payment of minimum employees'/employers' contributions (of 8% of pay) plus pension from SERPS/S2P might represent between 45% and 50% of final earnings or around a third lower than a typical 1/60ths contracted-out final salary plan.

"Nearly half of those organisations surveyed said they expect to review pension plans in the near future," said Colin Singer. "When they come to consider the changes that the government is introducing to the State benefits - particularly S2P and the terms of contracting-out , together with the continuing cost pressure and corporate restructuring - it is difficult to imagine that we are not facing another period of material change."


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