Final salary pensions in the private sector have closed their doors to new staff at the fastest rate on record, with just 13% of final salary pensions were open to new joiners in 2012.
According to a study by the National Association of Pension Funds (NAPF) out today, that represents a drop of a third from 19% in 2011, and the steepest fall since comparable data began in 2005, when 43% were open.
‘Defined benefit’ pension funds are also increasingly closing to the workers who are already in them. The number that shut their doors to existing staff climbed to 31% in 2012, a hike of over a third from 23% in 2011.
However, the survey also shows that total contributions from both employers and employees into the newer type of ‘defined contribution’ pensions edged to an all-time high of 12.5% of salary in 2012, which is well above the 8% minimum that auto-enrolment requires.
“The pressures on final salary pensions have proven too great for many businesses. The growing liabilities fuelled by quantitative easing will have been a factor behind the record hike in closures," said Joanne Segars, NAPF Chief Executive.
“Those starting a new job in the private sector have next to no chance of getting a final salary pension. What was once the norm is now a very rare offer. And those who are currently saving into one may find it gets closed."
This year’s survey took place against a turbulent backdrop. "2012 was a milestone year for workplace pension provision in the UK," notes the NAPF report. "October saw the start of an ambitious five year programme to introduce auto-enrolment across all employers, a reform that could see up to 10 million working people brought into workplace pensions in the UK, many of whom will be saving into a pension for the first time."
The survey shows that the few remaining private sector pensions which are still open to all staff will see big changes in the next five years. Almost half (46%) are planning to close the pension to new staff, and offer them a defined contribution pension instead.
Similarly, a third (29%) of those pensions closed to new joiners but still open to future contributions from existing staff said they would make changes in the coming years, including closing the scheme or making it less generous.
The report notes: "Looking ahead, 2013 looks set to be another testing year for those running pension schemes, with both threats and opportunities on the horizon. Late in 2012 the Government published its proposals for reinvigorating workplace pensions, including the Pension Minister’s vision for ‘Defined Ambition’ pensions that share investment, longevity and inflation risks between the employer, the employee and the industry.
"The findings from the 2012 Survey suggest that there are still many employers who are prepared to go far beyond the minimum in their pension offering whether through a DB, DC or hybrid arrangement."
The trend is almost certainly unstoppable. “We are in the midst of a pension regime change," argued Segars. "Auto-enrolment will bring millions of workers into a new breed of pension that will come to dominate in the private sector. It is encouraging that savings into these pensions have reached a new high, despite the tough economic conditions.
“While many have closed their doors, private sector final salary pensions are far from finished. More than two million workers are still saving into one and they pay the pensions of over four million pensioners. It is essential that the Government shows them more support in managing some extremely testing economic circumstances.”
The NAPF Annual Survey, which took in a total of 1,018 pensions with 9 million members and £628 billion, also found:
- Less than 10p in every £1 of pension fund assets is now invested in shares in UK companies.
- The proportion of total assets invested in UK equities fell from 12.2% in 2011 to 9.9% in 2012.
- At the same time the allocation to corporate bonds rose from 12.4% in 2011 to 15.1% in 2012.
- Two thirds (68%) of sponsoring employers have already decided which pension scheme to use for auto-enrolment, and a third (30%) have an employee communication plan in place.
- The creation of a new single-tier state pension will mean the end of contracting out.
- Of the defined benefit (DB) pensions that are open to new members or future accrual, 17% were contracted in, but 83% were still contracted out.
- The costs of running a DB pension in the private and public sectors rose in some areas.
- Mean costs for fund management and custody increased from £170 per member in 2011 to £186 in 2012.
- Fees to consultants increased from £98 last year to £116.
- A third year of pay freezes for local government workers and changes to the Local Government Pension Scheme (LGPS) being introduced from 2014 are putting financial pressure on LGPS members.
- A quarter of LGPS respondents said their opt-out rate had increased, while none reported that their opt-out rate had fallen.
