1 - Survey Sample

This 17th Annual Pension Scheme Administration Survey of trends and practices in the administration of workplace pension schemes was conducted via responses to printed and online questionnaires issued in February 2010.

The Survey was undertaken at a time when economic conditions remain uncertain – some might even say perilous. Whilst there are signs that the economy may have turned the corner, still many defined benefit schemes are heavily in deficit, causing sponsoring employers to review such arrangements and the benefits offered. At the same time, it would appear from our Survey that an increasing number of sponsors have begun to focus on how any defined contribution scheme that is offered stacks up against the emerging National Employment Savings Trust (NEST) scheme. The Survey results suggest that it is by no means clear that a significant tranche of existing schemes (with presently modest contribution levels) will be continued come 2012 and beyond.

This year's Survey drew responses from 414 workplace schemes run by some 280 organisations, with combined assets of almost £297 billion and a total membership of some 5.4 million lives. The sample covers both public and private sector schemes, holding around a quarter of total UK pension fund assets, as well as several major unfunded public sector arrangements (see Tables 1 and 2).

Table 1: Total assets of schemes covered by the Survey (£ bn)

Table 2: Total Membership of Schemes covered by Survey

Table 3: Size of schemes in Survey (by membership - all categories)

The size of schemes covered by the Survey stretches from those with fewer than 500 members through to major private and public sector schemes with hundreds of thousands of members. As well as many large schemes, this year's Survey again attracted a high number of smaller defined contribution schemes which are in many cases, for private sector employees, replacing the pension provision previously offered via defined benefit schemes (see Table 3).

The majority of the defined benefit schemes covered by the Survey are final salary arrangements. Unsurprisingly, this year's Survey again reported further evidence of final salary scheme closures to new entrants and future accrual, with an increased number of members covered by career average and hybrid arrangements – schemes offering both defined benefit and defined contribution elements or, more typically, sections (see Table 4).

Overall, 31 per cent of employees are not members of any of the schemes offered by their employers (disappointingly, an increase of just 3 points from the figure a year ago). This ongoing trend is alarming and it is to be hoped auto-enrolment in the years ahead will check the leakage from quality pensions. However, this is probably only a possibility if quality schemes remain open. For this to happen, many such schemes must become more affordable for sponsoring employers (which may require some significant regulatory easing).

Table 4: Make up of membership and status of Schemes

76 per cent of private sector final salary schemes covered by the Survey are closed to new entrants (up 5 points from a year ago and 9 points compared to two years ago), with 13 per cent of schemes also closed to future accrual for current employees. These closures are, however, almost entirely confined to private sector employers, albeit there is some evidence that public sector schemes are beginning to be reviewed in terms of moving towards career average rather than final salary based accrual, with in some sectors new options for employees to opt for defined contribution accrual.

The growing maturity of many private sector defined benefit schemes is reflected in the fact that the majority of members covered by schemes in the sample are no longer active members of their scheme. Active members form only 29 per cent of members, with deferred members forming 34 per cent and pensioners 37 per cent of the membership of private sector schemes.

However, the Survey gives a different picture for public sector schemes. Here, where schemes in the main remain open to new entrants, and where there has been a marked increase in membership over recent years, active members make up 36 per cent of members.

The pattern of private sector scheme closures means that the declining percentage of active members will continue. There may be some reversal of this situation when compulsory autoenrolment is introduced gradually from 2012, although it could be argued that these reforms may also herald – evidenced by results elsewhere in this Survey – the final chapter of defined benefit scheme closures as companies seek to limit the potential for significant pension cost increases arising from this requirement.

In contrast, defined contribution schemes reporting to the Survey are made up predominantly of active and deferred members, with very few pensioner members. This is indicative of the relative immaturity of the mass defined contribution market, but also the fact that many defined contribution pensioners simply use their pension savings to purchase an annuity on the open market, and are therefore no longer included in scheme membership statistics.

The trend in the defined contribution sector for more sponsors to move over to contract-based as opposed to trust-based arrangements, in the anticipation that this change will ease regulatory and administrative burdens, may be the cause of some concern in terms of the governance of such schemes – certainly sponsors may have a less clear view of how well such schemes are operating on a day-to-day basis.

This year's Survey found that 71 per cent of organisations in this sample have established defined contribution arrangements, with a higher number offering contract-based (as opposed to trust-based) schemes to new entrants (see Table 5). The more obscure nature of contract-based schemes means a number of respondents have not reported detailed information about such schemes to the Survey.

A third of the defined contribution arrangements have been established in the last five years as organisations have closed defined benefit schemes in the face of sharply rising costs and concerns regarding the rising liabilities associated with increasing longevity. Reflecting this trend, close to half of the defined contribution schemes are in fact sections of an original defined benefit scheme, where the latter is in many cases now closed to new entrants and/or future accrual

Table 5: Do you offer defined contribution (DC) arrangements?

What is the average employer and employee contribution into your DC scheme?

Is the DC scheme a section of an old DB scheme or is it a separate scheme?

Is there a matching contribution element?

When did you establish your DC arrangements?

Average employer contributions (7%) and employee contributions (4%) make up the average 11% of employee earnings going into defined contribution schemes – the same as for the last two years. Whilst contributions on average at these levels comfortably exceed the Government's NEST and qualifying scheme levels (8% of band earnings between approximately £5,000 and £33,500 per annum at 2006/07 levels), the reality remains that this level of pension saving, if not supplemented by other savings, is likely to deliver only modest pensions for many, particularly for those with shorter savings histories.

And, of course, there are many defined contribution schemes reporting to the Survey with employer and employee contributions below the average.

Awareness of the NAPF's Pension Quality Mark (see Table 6) has increased markedly over the last year. Twelve months ago, six out of ten schemes were unaware of the proposal. Under this award, defined contribution schemes with combined employer and employee contributions exceeding 10 per cent of earnings (with at least 6 per cent from employers) are now eligible to apply for a Pension Quality Mark provided they also meet certain governance and communications criteria. At the time of writing, some 42 schemes have achieved the award.

Whilst only a small number of schemes have to date sought the award, close to one in five responding to the Survey are considering such an approach. This would seem a sensible HR and PR approach in an era when members are seeking assurances about the quality of the scheme for their pension savings.

Table 6: NAPF Quality Mark Does your DC scheme qualify for the NAPF Pension Quality Mark?

Are you considering applying for the Award over next 12 months?

This year, 60 per cent of schemes responding to the Survey say that the total cost of managing their pension scheme(s) has grown at a faster rate than other business overheads.

There is a marked contrast between defined benefit schemes, where, unsurprisingly, threequarters (74 per cent) report costs outpacing other business overheads, whereas only a third (34 per cent) of defined contribution schemes voice this view.

The main reasons given for increasing costs are listed as fund performance, professional fees, changes in long-term assumptions and increased regulatory costs (see Table 7).

Table 7: Over the last 5 years, have the total costs of managing your pension scheme(s) grown more than your other business overheads?

If 'yes', what are the main reasons?