Employers paid record amounts into defined benefit pension schemes in 2012, according to Office for National Statistics data published today and analysed by Towers Watson.
Total employer contributions to self-administered pension funds rose from £39 billion (2011) to £45 billion in 2012. In cash terms, contributions were more than three times higher in 2012 than they were ten years earlier (£14 billion in 2002). The overwhelming majority of this money is paid to defined benefit (DB) schemes, predominantly those sponsored by private sector employers*. In February, Office for National Statistics (ONS) data revealed that the proportion of private sector employees still in DB schemes had fallen from 26 per cent in 2002 to 8 per cent in 2012**.
Mark Duke, a senior consultant at Towers Watson, said: “Employers are paying more and more money into their DB schemes even though the number of employees still in them is getting smaller and smaller. That these things are true at the same time underlines how the vast bulk of this money is being used to pay off deficits, not to promise new benefits.
“Despite these huge payments, many companies are still finding that their pension deficits are not getting any smaller, partly because of today’s very low interest rates. With plans to repair deficits having been blown off course, employers and pension scheme trustees face challenging negotiations over what to do about this. More money spent shoring up pension benefits promised in the past can mean less money available for wages, dividends and investment in the business.”
In Wednesday’s Budget, the Government announced that the Pensions Regulator will be given a new objective, based in the idea that it should ‘support scheme funding arrangements that are compatible with sustainable growth for the sponsoring employer and fully consistent with the 2004 funding legislation’. This will sit alongside its existing objectives ‘protect the benefits under occupational pension schemes’ and ‘reduce the risk of situations arising which may lead to compensation being payable from the Pension Protection Fund’.
Mark Duke said: “It’s not yet clear how much difference this new objective will make to the pace at which deficits get paid off. There is already flexibility to clear shortfalls over an extended period based on what employers can reasonably afford and trustees know it is not in members’ interests to damage the employer by demanding too much money too soon. However, the mood music from policymakers now sounds more company-friendly and employers will bring that knowledge to the negotiating table.
“The new objective may affect how deficits are calculated as well as how quickly shortfalls are eliminated. It appears that some employers and trustees may have felt shoe-horned into calculating deficits in a way that makes them especially sensitive to gilt yields, even though the legislation permits different approaches which have also been widely used.”
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