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The Actuary The magazine of the Institute & Faculty of Actuaries

FTSE 100 companies continue to favour DC schemes

Towers Watson’s annual survey of FTSE 100 companies has shown that the vast majority continue to use a defined contribution (DC) scheme as their main form of pension provision.

A quarter of FTSE 100 companies offer only DC to all employees, which is up from 15% last year. Around 90% of these companies offer a DC scheme for new employers, with the rest offering different forms of defined benefit (DB) schemes (6% career average, 2% cash balance, 2% hybrid and only 1% final salary).

Paul Macro, senior DC consultant at Towers Watson, said: "With a two-third increase in the number of FTSE 100 companies offering only DC to their employees, DC pensions continue to dominate the retirement savings landscape. This is a trend we expect to see continue in the next couple of years as more firms close DB schemes to future accrual and frequently replace DB with DC.

"This contrasts strongly with recent proposals by Lord Hutton to move public sector pensions away from final salary to career average and not defined contribution which, if implemented, will mean the gap between private and public sector pension provision will continue to widen."

The survey also shows growth in employer contributions has levelled out, with the rate of increase in overall maximum employee and employer contributions slowing down during 2010. During the same period the provision of employer contributions that are based on the level of employee contributions remains by far the most common approach.

Previously, there was a steady increase in the maximum combined employer and employee contributions, rising from 13.7% of salaries during 2005 to 16.5% of salaries during 2009. However, the latest survey shows only a small increase during 2010 to 16.7% of salaries.

Macro commented: "Previous years have seen strong growth in contribution levels as companies conducting DC plan designs and reviews have recognised the real need to offer access to higher levels of contributions in order to provide members with a decent level of retirement income. However this growth now seems to have stopped, but at a level which is clearly much better for members than we saw just a few years ago, and still well short of the cost , for companies, of providing the vast majority of defined benefit plans."

Additionally, the survey indicates that the levels of overall contributions available varies considerably between different sectors represented in the FTSE 100. For example, overall maximum contributions available to workers in the chemical, pharmaceuticals, energy and financial services industries are all much greater than the overall average at over 18.5% of salaries, whereas workers in retail, travel, media and technology fair worse than average with overall rates available of less than 15% of salaries.

Towers Watson’s FTSE 100 Defined Contribution Pension Scheme Survey, now in its seventh edition, is based on data from 96 companies in the FTSE 100 Index.