FTSE100 companies with defined contribution (DC) schemes are prepared to pay an average of 10 per cent of salary into employees’ pensions, according to Towers Watson. The firm’s latest survey of FTSE100 companies’ DC pension schemes also found that:
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In three quarters of schemes, Annual Management Charges (AMCs) are no more than 0.4 per cent of the member’s account balance where they remain invested in the default option.
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Where companies automatically enrol staff into pension schemes, more than 90 per cent usually stay in.
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Some 27 per cent of companies surveyed have closed a defined benefit (DB) scheme to existing members as well as new entrants, up from 4 per cent in 2010. If this pace of change were to continue, all FTS100 DB schemes would be ‘hard-closed’ within a decade.
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Schemes overseen by trustees tend to have a smaller range of fund choices than workplace personal pensions but their members are more likely to make a choice.
Contributions
Where employers provide the same contribution rate for all members, their contributions average 9.3 per cent of pensionable pay. It is more common for employers to vary their contributions according to how much employees are prepared to pay themselves. Here, the average core employer contribution is 5.1 per cent, with a further 5.1 per cent available for members who take full advantage of matching contributions. There was significant variation around these averages.
Will Aitken, senior consultant at Towers Watson, said: “Employers with matching designs typically put a little more money on the table but may expect to spend less of it, as not all employees will choose to save enough themselves to benefit in full.
“Under matching scales, employers match employees’ contributions at least pound for pound, providing an incentive for members’ to put more of their own money aside. This will generally produce bigger pensions where employees are engaged and smaller pensions where they are not. Some employers like to target money on employees who demonstrate that they value pensions. For people who find themselves put into a pension scheme automatically, staying on autopilot can mean missing out.
“For most large employers, new minimum contribution rates are significantly below what they chose to offer when it was up to them whether they provided a pension at all. However, many of those with matching scales will not be able to put employees onto the lowest rung once minimum contributions are fully phased in.”
Charges
Some 74 per cent of schemes said that the Annual Management Charge in their default investment option was 0.4 per cent or less, compared with 53 per cent in 2012. Overall, the average AMC is 0.33 per cent in trust-based schemes and 0.37 per cent in contract-based schemes but the gap is wider (0.22 per cent vs. 0.38 per cent) if the comparison is confined to purely passive investments. 19 per cent operate a different charging structure for ex-employees who leave their pension pot behind, which is likely to involve them paying more.
AMCs in stakeholder schemes are currently capped at 1.5 per cent for the first 10 years of saving and 1 per cent after that. The National Employment Savings Trust (NEST) combines a 0.3 per cent Annual Management Charge with a 1.8 per cent levy on contributions and estimates that this is broadly equivalent to a 0.5 per cent AMC.
Will Aitken said: “Smaller employers may frequently find that NEST’s charges are more than competitive. However, large firms have often been able to use their buying power to negotiate lower costs for their employees, and we have seen many schemes negotiate keener charges for their members in recent years. In a few cases, employers will also contribute towards running costs so members pay less.
“Higher charges for former employees are a minority pursuit and may die out under the Government’s plan for pension pots to follow members from job to job. If there are fewer ex-employees who leave their money behind, higher charges for these members will not do much to help providers make the sums add up.”
“Although the gap between charges in trust-based schemes and contract-based schemes has closed, our survey found that trust-based members are more likely to get exposure to active management or a diversified growth strategy in return for their fees.”
Last week, the Department for Work and Pensions said it would consult in the autumn on whether a charge cap should apply to the default investment option in all DC schemes.
Will Aitken said: “Not all charges are the same – some are worth paying and some aren’t.
“A charge cap could help members whose charges are high because the provider needs to claw back commission paid to an employer’s adviser. Ironically, the Government’s ban on ’consultancy charging’ will not stop advisers who operated in that way from claiming further commission payments where new employees are enrolled into an existing scheme.
“Depending on where it is set, a charge cap may not make much immediate difference for large employers. However, it would be a blunt instrument and risk stifling innovation in investment strategy where the best ways of balancing risk and return will cost more to implement.”
Participation Levels
Half of the companies surveyed were already enrolling employees into pensions when the research was carried out. Many of these firms were doing so voluntarily and were not yet subject to the legal requirement to use automatic enrolment.
Some 72 per cent of those employers using automatic enrolment reported that more than 90 per cent of new employees stayed in the pension scheme. Amongst employers who still used an ‘opt in’ joining mechanism, only 23 per cent said this and the same proportion recorded that no more than one-fifth of new employees joined.
Will Aitken said: “The evidence is mounting that opt-out rates are going to be far below the one-in-three level originally predicted by the DWP. Employers who have yet to implement automatic enrolment should be budgeting for a high take-up rate. The danger is that employees trust the authorities not only to take the decision on scheme membership for them but also to decide how much they should contribute.”
Plan Closure
Some 34 per cent of FTSE100 companies now have no employees earning DB pensions, including 27 per cent who used to but have now completely closed their schemes.
Will Aitken said: “DC has long been most large employers’ vehicle of choice for new employees. Closing to existing members too is not yet the norm but we are quickly getting there. If the pace of hard closure seen in recent years continued, all FTSE100 companies’ schemes would be completely closed within a decade. Bigger than expected deficits and the loss of National Insurance rebates from 2016 may lead more employers to do this sooner rather than later.”
Investment: More Choice, Less Choosing?
Some 67 per cent of contract-based schemes offer more than 50 investment choices, whereas 75 per cent of trust-based schemes offer between 5 and 15. However, whereas 47 per cent of trust-based schemes said that at least one member in five invested outside the default option, only 23 per cent of contract-based schemes said this.
Nico Aspinall, head of DC Investment at Towers Watson, said: “Sometimes, more choice can mean less choosing. Selecting an option from a long list can appear more daunting. One-third of contract-based schemes are now offering a narrower core fund range alongside the full menu in order to combine a manageable choice for most members with greater flexibility for experienced investors.”
The survey also found that:
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Some 42 per cent of schemes use white-labelled funds, which allow the schemes fire and replace fund managers without disturbing the unit holdings of scheme members. A majority of trust-based schemes do this for at least some of their funds.
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The most common switching period over which default investment options switch to less risky asset classes as members approach retirement in 10 years (57 per cent).
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In 22 per cent of trust-based schemes and 8 per cent of contract-based schemes, the default option involves some use of diversified growth funds.
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