UK companies remain committed to providing pensions for staff, but the high cost of funding final salary schemes is damaging business competitiveness and investment, a survey by the CBI and Watson Wyatt revealed today (Monday).
The survey shows that over half of firms (54%) reported that growing contributions made to defined benefit (DB) 'final salary' schemes are harming profits and competitiveness. 40% of firms said pensions costs had forced them to cut back on other employee benefits, and 27% reported cutting investment, with medium-sized employers particularly affected. One in six (16%) said jobs were cut to cover pensions costs.
But the survey of 246 CEOs, chairmen and senior board members - between them employing 1.1m staff - also showed a resilient commitment to pensions provision. 86% want their staff to retire with adequate savings, and 84% said firms should help raise awareness of planning for retirement and that a company pension scheme helps recruit and retain staff. But less than one in ten (9%) thought firms should provide final salary pensions for all their employees.
John Cridland, CBI Deputy Director-General, said: "Businesses are determined to help provide a decent retirement for their staff, and see a good pension scheme as a big advantage when recruiting.
"It is nonetheless clear that the large and growing burden of defined benefit pension contributions is taking its toll on future jobs, investment and growth.
"However it is encouraging that more and more staff as well as businesses are seeing defined contribution schemes as a valuable vehicle for retirement savings, and that contributions from firms are rising. But too much money is left on the table by staff not joining a pension scheme, or failing to take their company up on its highest level of contribution."
More firms are shifting to defined contribution (DC) pensions schemes and, since 1994, the proportion offering DC schemes has increased from half (50%) to two thirds (67%). Employers are now contributing an average of 7.2% of salary into DC schemes, compared with 6.6% in 2006. Take-up among staff of DC schemes has risen sharply in recent years, from 38% in 2004 to 64% today.
But employee perception of pensions continues to concern bosses. Half (49%) said staff do not value their DB schemes as much as the company would like, while over two thirds (69%) said the same of DC schemes.
Only half of those in DC schemes are paying in enough to qualify for the maximum employer contribution, meaning that, when the survey results are extrapolated over all private sector schemes, employees are passing up on £1.5bn in deferred pay. It is encouraging that nearly half (45%) of firms are considering taking action to increase take-up of DC schemes.
The availability of DB schemes has declined, with only a fifth (18%) of firms offering them to new employees, although 62% make DB provision to existing employees. DB schemes are now largely the preserve of larger firms, who are better placed to deal with the greater cost and risk of such schemes. Almost all (91%) larger firms offer DB schemes to existing staff, but only a third (37%) have a DB pension open to all.
Despite the closure of most final salary schemes to new staff, costs continue to rise inexorably. The survey shows that average company contributions during 2007 to DB schemes rose to a record 22% of salary, and reflects a disturbing upward trend from 20% in 2006, and 16% in 2004.
Firms are increasingly concerned with reducing the volatility of pensions costs, with 64% citing it as a priority. Pensions costs stem from a combination of volatile investment markets, uncertainty over future life expectancy, and red tape.
Stephen Yeo, Senior Consultant with actuaries Watson Wyatt, said: "The survey confirms that DB provision is still in retreat and that firms’ DC pension arrangements are not necessarily delivering what firms or their employees need. We hope that the Government’s response to the deregulatory review of private pensions will make it easier for firms to provide sustainable and valued pensions."
More workers postponing retirement
The survey is also the first to assess the impact of laws introduced in October 2006 which allow those reaching 65 to request staying on in employment. One in five (22%) employees approaching retirement asked for their retirement to be postponed, and companies granted almost three quarters (72%) of these requests. More employees are expected to request postponement, and the proportion of firms offering a range of options, including full and part-time work at retirement has increased since 2006.
Half of employers offered the option to continue full-time employment, and 44% allowed employees to continue working while drawing a pension, up from only 24% last year. One in five employers (21%) allowed phased retirement, an increase on 16% last year.
John Cridland added:
"It is encouraging that the new right to request postponed retirement seems to be working well, and both employers and staff value this flexibility. Firms want to retain employee skills and experience, while staff can enjoy a phased retirement, or can continue working flexibly to boost retirement savings. However, this early success is founded on the company’s ability to have a final say on an individual’s retirement date.”
1. The survey was carried out in May 2007 to cover 2007. A total of 246 CEOs, company chairmen and senior board members responded. Journalists interested in receiving a pdf copy of the report should email paul.platt@cbi.org.uk. Non-journalists should email neil.carberry@cbi.org.uk
2. A defined benefit pension scheme guarantees a fixed percentage of salary on retirement, depending on the number of years of service. A defined contribution scheme is one where the pension level is dependent on the performance of funds invested over a working life.
3. The CBI is the UK's leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce.
The organisation is also the UK's official business representative in the European Union, which generates more than 50 per cent of regulation affecting British firms.
With offices across the UK as well as in London, Brussels, Washington and Beijing, the CBI coordinates British business representation around the world.
4. Watson Wyatt is the trusted business partner to the world's leading organisations on people and financial issues. The firm’s global services include: managing the cost and effectiveness of employee benefit programmes; developing attraction, retention and reward strategies; advising pension plan sponsors and other institutions on optimal investment strategies; providing strategic and financial advice to insurance and financial services companies; and delivering related technology, outsourcing and data services. Watson Wyatt has 7,000 associates in 31 countries and is located on the web at www.watsonwyatt.com.