[Skip to content]

Sign up for our daily newsletter
The Actuary The magazine of the Institute & Faculty of Actuaries
.

FTSE 100 DC contributions rise despite downturn

Despite the economic downturn, the average maximum contribution that large employers are making to defined contribution (DC) pensions is increasing, according to a survey of FTSE 100 companies by Towers Watson.

Some 88% of FTSE 100 companies provide DC pensions and the average maximum contribution - available if employees take full advantage of "matching contributions" from their employer - is now 16.5% of salary, up from 15.3% last year and up from just 13.0% six years ago. This year’s figure is made up of an average maximum employer contribution of 10.6% and employee contribution of 5.9%.

"Companies are restructuring their pension schemes so that more of the money they contribute goes to those employees who are likely to appreciate it the most - that is, those who are willing to contribute more than the minimum themselves," said Paul Macro, a senior DC consultant at Towers Watson. "This is a trend we expect to continue in the run-up to the pension changes that come into force from 2012."

A driver for this is requirement for companies to "auto-enrol" employees into their pension scheme from 2012. Employees will have to opt out rather than opt in, which is expected to increase the number of employees joining pension schemes. While this is what the legislation intends, it will be a cost to employers - and a significant one in industries with many younger staff or naturally higher levels of staff turnover.

"Companies may look to redesign their schemes so the base-level contributions are near the legal minimum while weighting higher contributions towards those employees who are engaged and willing to contribute more themselves," adds Macro.

According to Towers Watson, many companies will be forced into making design changes to their DC pension scheme anyway in order to meet 2012 requirements. This is not because companies currently provide low contributions - indeed, on average FTSE 100 companies provide more than double the requirement. It is because the 2012 rules use different criteria for who is eligible to join a scheme and what counts as "qualifying earnings" to calculate contributions than those used by most employers.

More employers are already using auto-enrolment in the run-up to 2012. Some 44% now auto-enrol compared with 39% in last year’s survey. This is having a positive knock-on effect on take up rates, with 61% of companies now having more than 90% of their eligible employees as members of their DC pension scheme. This is up from 55% last year.

"DC take-up rates are now high for many companies but at the other end of the scale there are some companies with currently low take-up rates and the impact of the 2012 changes could be very significant for them," said Macro. "Some 15% of FTSE 100 companies with DC schemes have less then 20% take-up rates and currently none of these auto-enrol."

A third of companies changed their investment options in the past year. Most schemes offer between five and 10 fund choices and the offering of specialist investment options is increasing. Despite this, the use of the default investment by members remains stubbornly high - for over 60% schemes, more than 80% of members opt for the default.