NAPF survey shows active DC membership outstrips DB for the first time
The National Association of Pension Funds (NAPF) has published the 40th annual survey of its members, providing an insight into the pension provision of some of the UK’s largest employers and pension schemes.
The 2014 survey found that active membership of defined contribution (DC) schemes outstripped active membership of defined benefit (DB) schemes for the first time. The average trust-based DC scheme now has 15,000 active members, compared to just 4,500 for the average DB scheme. Despite this, DB still remains the dominant investment force in UK workplace pensions, with DB schemes holding some 94% of the £719 billion total respondent assets.
As ever, the survey provides some useful indicators of the current state of pension provision. These include the following:
Auto-enrolment
95% of respondents, excluding local government pension schemes (LGPSs), have begun the auto-enrolmentprocess. Of these:
- 83% of employers are using, or plan to use, a DC scheme for auto-enrolment
- The average (mean) opt-out rate has increased from 12% in 2013 to 14% in 2014, with the average (median) rate at 8% for both years. This compares to 10% in larger employers found by the Department for Work and Pensions. The NAPF’s mean figure is skewed by schemes with very high opt-out rates due to strong existing participation levels
- 33% said that for all employees joining under auto-enrolment they would contribute only in line with the minimum required under the legislation
DB schemes
Just under 60% of scheme members included in the survey are in DB schemes (excluding LGPSs):
- Active membership has fallen sharply to just 16% of all DB scheme members (1.1 million), having remained at around 20-21% since 2010. Over the same period, the proportion of schemes still open to future accrual has decreased from 66% to 50%. Just 14% of schemes remain open to new members, down from 27% in 2010
- Over the period 2012 to 2014, 81% of respondents made additional cash contributions and 78% made asset-backed contributions to their schemes, with an average (median) additional contribution of £6m
- The average cost of running a DB scheme has risen sharply to £485 per member (from £391 in 2013)
- Average scheme funding levels are around 89% on the scheme funding basis (86% in 2013) and 65% on the buyout basis (63% in 2013)
DC schemes
There were 2.3 million active DC scheme members included in the survey (more than double the 1.1 million reported last year).
- Trust-based DC scheme popularity has returned to a level (54%) not seen since 2008 as respondents indicated a growth in the use of master trusts
- Average employer DC contributions fell slightly to 7.6% (from 8.3% in 2012), whilst employee contributions held firm at 4.1%. This may be due to the impact of auto-enrolment, with lower initial contribution rates often seen for automatically enrolled employees. Almost two-thirds of DC schemes operate on a matching contribution basis
- 94% of schemes offer a default investment fund option, with 87% of active members currently investing in the default fund (84% in 2013)
- Members pay an annual management charge in 78% of schemes, with the median charge being 0.40%. Employers pay for fees to external advisers in 72% of schemes
- For members retired in 2014, the average value of the pension pot at retirement was £24,309 (£28,000 in 2013)
Governance
The membership profile of trustee boards is gradually changing. The proportion of independent trustees has grown to 55% (from 48% in 2013) with an independent chair of trustees in 41% of schemes (up from 34% in 2013). 53% of schemes have no sponsor company director on their trustee board.
Comment
This year’s NAPF report shows that, for the average scheme surveyed, it has very much been business as usual. This may be unsurprising as many changes to the pensions landscape introduced in the last couple of years would have already been taken into account by the larger schemes, either as voluntary good practice (eg the new DB funding code of practice and the DC charge cap), or as mandatory changes already made (eg auto-enrolment). It will be interesting to see how the changes introduced in the Chancellor’s Budget in March and the ending of contracting-out in April 2016 will pan out in next year’s report.
Increases to State benefits and tax allowances confirmed
The Department for Work and Pensions has published a schedule which sets out the social security benefit rates from April 2015, and the Chancellor’s Autumn Statement included a schedule of tax rates and thresholds for the 2015/16 tax year. Together they confirm most of the social security and tax rates and thresholds from April 2015, including the following:
- The Basic State Pension from April 2015 will be £115.95 pw for a single pensioner and £185.45 pw for pensioner couples
- SERPS/S2P benefits in payment in 2015/16 will increase by 1.2%
- The Lower Earnings Limit for national insurance purposes will be £112 pw
- The Income Tax Personal Allowance will now be £10,600 from 6 April 2015 (not £10,500 as set in the Finance Act 2014) – the basic rate tax band will be £31,785 from 6 April 2015 (unchanged from that set in the Finance Act 2014) and so the Upper Earnings Limit (UEL) rises to £42,385 in order to maintain the link between it and the point at which higher rate (40%) tax is payable; and
- The primary (employee) earnings threshold for national insurance contribution liability will be £155 pw from 6 April 2015 and the secondary (employer) threshold will be £156 pw
The £2.85 pw cash uplift in the Basic State Pension is this year also being applied to the standard minimum income guarantee in the Pension Credit, with the Savings Credit threshold rising by 5.1% so that the net effect of both measures is broadly cost neutral.
Former Royal Mail workers fall into an Annual Allowance trap
Some problems with the Annual Allowance (AA) regime have been raised in an end-of-day Adjournment Debate (starting at Column 398) in the House of Commons. The debate was secured by Toby Perkins MP (Labour, Chesterfield) who raised concerns about AA charges arising for many former Royal Mail IT workers in his constituency whose employment was transferred in 2003 to Computer Sciences Corporation Ltd (CSC) under the TUPE protocol.
Mr Perkins explained that these employees were given post-2003 pension accrual in CSC’s arrangements but had the choice of whether to leave their accrued pensions in the Royal Mail scheme or transfer them for benefits in CSC’s arrangements. He stated that, with the current redundancies and CSC respecting the additional pension rights that arise under TUPE, very different AA positions are emerging between those who transferred and those who did not, so potentially a large AA charge is arising depending on the choice made in 2003 – even though in 2003 the members would have thought the decision to transfer rested only on views of future security and best return. Noting the way some benefits are valued for AA purposes, Mr Perkins said that “The Government have accepted the possibility that individuals on lower incomes could in exceptional circumstances face a sharp increase in the tax charged on their pension, but as I have demonstrated, such moderate language does not reflect the significant numbers that might be affected or the size of the impact on their pension planning”.
Andrea Leadsom (the Economic Secretary to the Treasury) replied for the Government and expressed sympathy for the issues raised but, after outlining how the Government’s policy relating to AA developed, only stated that the issues “will be kept under review and that the specific cases he has discussed will be taken into account”.
Comment
As Ms Leadsom acknowledges, there are well-known real crudities in the way the AA methodology works. Some benefits are materially overvalued (particularly defined benefit temporary pensions which are part of the problem here); members with identical benefit accrual overall can end up with very different AA positions solely because of the particular structure of how the benefit is delivered; rearrangements of how benefits are delivered following corporate restructuring can lead to complex AA situations (or even something as simple as the employer changing the provider used for DC savings).
Three year carry forward of unused AA has meant that for many such cases no AA charge actually arises – but the problems increase as the AA reduces in real and sometimes absolute terms. It will be interesting to see whether such a high profile case gets some of the AA rules changed.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
