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The Actuary The magazine of the Institute & Faculty of Actuaries

Fall in pension scheme participation ‘reaching its nadir’

Towers Watson has claimed that participation levels in workplace pension schemes are ‘approaching the nadir’ after government figures published today revealed only 33% of private sector employees were members of a scheme in 2011.

John Ball Towers Watson
John Ball, head of UK pensions at Towers Watson

Participation levels in the public sector were far higher, at 83%, but the data from the Office for National Statistics showed that the total proportion of the workforce signed up to a workplace pension scheme last year was 48%. This is the first time it has dropped below 50% since records began in 1997.

Data also included in the 2011 edition of the ONS Annual Survey of Hours and Earnings reveals the percentage of the private sector workforce in defined benefit schemes has now dropped to just 9% - down from 34% in 1997.

More than twice as many private sector employees are now contributing to an occupational defined contribution pension as are building up new DB pension entitlements

John Ball, head of UK Pensions at Towers Watson, said: ‘Pension participation has been getting worse for some time, but we should now be approaching the nadir.’

The introduction of auto-enrolment later this year would be a ‘game-changer’ , he said, but its slow rollout means that for almost half of the people due to be auto-enrolled, nothing will happen for at least three years. 

‘Automatic enrolment sounds like a simple solution but the rules, which have only just been finalised, are far from straightforward.  The largest employers have just a few months to finish overhauling their payroll and pension processes so they can comply.

‘These employers typically offer valuable pension contributions already. An important question for them will be whether the employees they sign up automatically will value the pension as much as employees who actually opted in.  Companies will want to avoid spending money on benefits that employees do not value.’

Towers Watson contrasted the low level of participation in DB schemes in the private sector with the situation in the public sector, where 79% of employees were active members of DB schemes in 2011.

Mr Ball said: ‘The number of private sector employees in defined benefit schemes has been in freefall and will drop further before it levels off.  Most companies' defined benefit schemes are closed to new entrants, so the number of employees with this sort of pension will gradually decline as existing staff move on.  

‘Many schemes are also about to embark on new valuations which may show bigger shortfalls.  This could be a trigger for companies to stop existing members from accruing further benefits so that more of their limited pensions budget can go towards plugging the deficit.’

Mr Ball noted the government had said DB pensions in the public sector would continue for at least 25 years, but he said the situation for the majority of private sector employees would be a ‘very different story’.

‘As the spread of defined contribution provision puts pension risks firmly on individuals' shoulders, employees must be encouraged to take responsibility for their retirement planning and consider upping their contributions if blown off course,’ he said.

‘If everything is left on autopilot until retirement, the only things that can adjust are when you can retire and how much you have to live on when you stop working.’

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