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Contact: Alistair Peck
Tel: +44 20 7178 3143

UK
London, 5 October 2009

• Contributions to defined contributions pension schemes have increased by 1.5 percent since 2007
• 23 percent of companies not yet considered impact of Personal Accounts regulations
• Less than half of companies take advantage of cost savings through salary sacrifice

Despite the recent economic downturn, average contributions to UK defined contribution (DC) pension schemes have increased by 1.5 percent over the last two years, according to a Mercer survey. The research looked into the DC pension offerings of 345 UK companies, representing some 1.2m members and £10bn in assets under management. Since 2007, employers have on average increased their contributions from 6.80 to 7.25 percent, whereas member contributions have increased from 3.60 to 4.65 percent.

With cost containment high on most UK companies’ agendas it is interesting to see that the vast majority of survey participants (92 percent) have decided not to make any reductions to DC contributions in the near future. Only 4 percent are considering making any such changes, just 2 percent have temporarily suspended contributions and as few as 1 percent of employers have temporarily decreased contributions.

Tony Pugh, UK head of defined contribution pension services at Mercer, said: “It is encouraging to see this increased level of commitment to DC pension provision. It reflects a maturing attitude to DC pensions as it becomes the most prevalent form of provision in the UK.”

Mr Pugh continued: “As sponsors leave behind DB in favour of DC for new hires and, increasingly for existing employees, the need for a scheme to be successful is high on the corporate agenda. In fact, 78 percent of participants stated that an arrangement ‘valued by employees’ was their top success factor and this, in part, could be accomplished by higher contributions. However, there remains much work to be done in this area as only 16 percent of participants believed they had been successful in achieving appreciation.”

The participants cited ‘controlling cost volatility’ (59 percent) and ‘reducing overall cost’ (49 percent) as the highest priorities when establishing a DC plan, ranking these above ‘encouraging employee responsibility’ and ‘providing employees with an adequate benefit at retirement’.

Mr Pugh commented: “The switch from defined benefit to defined contribution pension still needs to be carefully managed. Educating employees on what DC schemes can offer and how much contribution is required for members to enjoy a comfortable retirement remains an urgent task. Employers should be encouraged to acknowledge that in order to avoid being faced with an aging workforce that is without the means to retire, greater emphasis should be placed on educating and communicating with DC scheme members.”

Auto-enrolment and Personal Accounts
As many as 95 percent of survey participants offer employees voluntary membership of the company’s DC plan. Over half (53 percent) target a take-up rate of over 90 percent, however less than a third (29 percent) achieve this. In fact nearly half (41 percent) of the plans surveyed have a take-up rate of less than 60 percent.

Unsurprisingly, 50 percent of participants believe the introduction of Personal Accounts in 2012 will lead to increased costs. As a consequence, 45 percent of participants are considering introducing auto-enrolment during the next two years. However, 23 percent of survey participants have not yet considered the impact of Personal Accounts on their business.

Steve Charlton, a principal and senior consultant in defined contribution pension said: “The introduction of Personal Accounts will have a considerable impact on company remuneration budgets and the only way to avoid a shock is to start thinking about how to measure and mitigate the risk now.”

“Although the DWP recently announced a staggered plan for implementation of the Personal Account requirements, medium-sized and large companies still need to be compliant by 2012.”

Many employers have also sought to offset this future cost increase by introducing pension salary sacrifice. The number of companies that have implemented salary sacrifice has increased to 40 percent, from 13 percent in 2007. “Despite the large increase, most companies are still not taking advantage of what could be a significant cost saving for their DC plans,” said Mr Charlton.

The full results of the survey will be presented at a webcast on 5 November. To register for this event, or the upcoming webcast on Personal Accounts visit: www.mercer.com/webcasts

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Contact: Alistair Peck
Mercer Press Office
Tel: +44 20 7178 3143