U.K. Pension Contributions Fall in 2008

April 13, 2010 (PLANSPONSOR.com) –The first annual fall in contributions to funded pension schemes to be recorded by the U.K. Office for National Statistics (ONS) reflects funding plans for defined benefit schemes that were agreed to in relatively benign circumstances and could quickly be reversed, according to Towers Watson.

A Towers Watson news release also said that a substantial increase in pension contributions over the previous decade was driven primarily by employers facing up to the increased cost of DB pension promises made in the past rather than by people taking action to boost their retirement incomes.

According to the news release, the ONS estimates that contributions to funded U.K. pension plans fell from £64.2 billion in 2007 to £59.8 billion in 2008, after rising in cash terms during each of the previous twelve years. This includes contributions to private sector employers’ pension plans, personal pensions, and the local government pension scheme. 

“If you scratch beneath the surface, the fall in the total amount of money being put aside for retirement is similar to the fall in the amount employers were paying into defined benefit plans,” said Rash Bhabra, head of corporate consulting at Towers Watson, in the news release. “The contributions employers paid in 2008 reflected agreements hammered out with trustees before the financial crisis struck, when deficits were smaller. When this is the reason, less money going into pensions can actually be ‘good news’ but it won’t last long. Following fresh valuations, companies will have to pay more each year or take longer to clear their deficits. Many will do both.”

Expressing the ONS estimates as a share of national income, total contributions to funded pension plans rose from 3.4% of GDP in 1995 to a peak of 4.8% of GDP in 2006, before falling to 4.1% in 2008.