04 Apr 2016

Research: How much employees contribute to pensions

Defined contribution (DC) pensions are being touted as the way forward.

Over the last few years in the UK, we have seen a shift from defined benefit (DB) to DC retirement plans. This trend has been so significant, we have got to the point where many large DB plans are no longer open to new employees. And now we wait to see what the full scale impacts of the March 2016 Budget will be (that is, will employees be tempted away from workplace pensions and into the new Lifetime ISA?).

There are three basic concepts within DC retirement plans, all of which are equally significant, to both employers and employees:

1.       Contributions
2.       Member support
3.       Value for money

Below we look at the issue of contributions highlighted within the recent PS Aspire, Trends in the DC Market Survey results which is based on over 100 employers of differing sizes (see Figure 1), conducted between June and August 2015.

Figure 1 - Employer sizes participating in the survey (no. of employees)

Contribution levels

Figure 2 shows the typical level of employee and employer pension contributions as a percentage of pensionable earnings. It is clear that employees typically contribute between 0-5%, slightly skewed towards the upper end with almost a third of employees contributing 5%. There is an underwhelming figure of around 7% contributing anything greater than 5%.

Employers, on the other hand, produce a broader range of contributions though the majority is in the 5-6% middle ground. What is noticeable, however, is that there are almost a fifth of employers willing to contribute 10% or more into their employee’s pension pots.

Figure 2 - Typical employer and employee contributions

These contributions are a percentage of pensionable earnings, however, our survey shows that respondents have different definitions of pensionable earnings (see figure 3). For the most part, at 75%, basic salary is widely regarded as the definition for pensionable earnings. As few as one in ten are using auto-enrolment ‘qualifying earnings’ as their definition.

Figure 3 - Elements of pay contributions are based on

Across these employers, the basis of their contributions were quite varied (see figure 4). The link between an employer and employee contribution applied to almost half of the schemes questioned within the survey.

Figure 4 - Basis for employer pension contribution

Other factors stated by employers include transferred staff retaining their previous employer’s contribution basis; longer standing employees benefitting from a more favourable contribution basis than new starters; and ex-final salary scheme members subject to a different contribution basis than other employees. As such, many of these other factors are measures put in place to deal with legacy issues.

A minority of schemes are applying a combination of two of the above variants e.g. employee contribution and age or employee contribution and length of service, to determine the employer contribution level.

This article was provided by Punter Southall Aspire.