UK Employers Turning Away from DB Schemes

May 13, 2002 (PLANSPONSOR.com) - Nearly a quarter of private sector employers in the UK plan to close their defined benefit plans to new workers, and another 11% will close them to all workers, according to a new study.

Instead, employees would switch to money purchase schemes, which pay out benefits based on the level of contributions and investment returns, according to a Reuters report.

Contribution Cut

Figures from insurer Norwich Union show that average employer contributions to money purchase schemes is only 5.8% of salaries compared to an average of 11% for defined benefit schemes.  That could result in lower retirement incomes for thousands.

And contributions to stakeholder pensions, targeted by the government at lower paid workers, are just 3.7% of salaries.

New accounting standard FRS 17 is also putting pressure on companies to abandon final salary schemes and switch to cheaper money purchase plans at a critical time.

Alternative Courses

Norwich Union said the government should give tax breaks to employers based on the level of their contributions or the percentage of the workforce taking part in the scheme.  Alternatively, the insurer also suggested adjusting taxation to give an incentive to employers to raise pension contributions rather than salaries, as well as the development of an education program that could boost worker appreciation of the pension programs.

‘The government will not make serious inroads into the so called savings gap unless it can persuade private sector employers to offer significant financial commitment to their pension scheme, said Iain Oliver, head of corporate pensions at Norwich Union.

The Norwich Union survey covered 1,003 employers, of whom 363 offered defined benefit schemes.

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