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Defined contribution continues to dominate UK private sector pensions

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Defined contribution is continuing to dominate pensions in the UK's private sector, as the decline of defined benefits schemes accelerates, according to forecasts from MetLife Assurance.
Defined contribution continues to dominate UK private sector pensions

The report shows that out of around 9.5m active members of private sector workplace pension schemes, only 1.6m are accruing new defined benefits, where the amount a pensions will pay out is guaranteed and directly related to an employee’s salary, with this figure projected to fall to less than 1m by 2020.

The report notes the increased cost of funding a defined benefit pension, which has risen from 11% of salary in the 1950’s to 21% of salary now. The combined cost of all the risks associated with defined benefit pension scheme provision has reduced the attractiveness of providing defined benefit pensions in the private sector.

Wayne Daniel, CEO at MetLife Assurance said: “Managing the legacy liabilities and assets of defined benefit schemes is a major issue for the pensions industry. The industry has to work harder to explain what is happening and how employers, trustees and employees should respond. The PPI report is a major contribution to increasing understanding of the challenges facing private sector pension provision.”

Active membership of private sector defined contribution schemes, where the pension pay-out is not guaranteed but relies on stock market performance, is projected to more than double from 6.6m to 16m.

According to MetLife Assurance, this transformation of the private sector pension landscape in the UK means that most of the complex and often little-understood risks associated with providing a pension, like longevity, investment and inflation, will be transferred to future new employees.

Rising costs and risks associated with sponsoring employers and trustees of running defined benefit schemes has highlighted strategies to mitigate liabilities with risk transfer deals such as buyouts, buy-ins and longevity deals reaching around £40 billion between 2007 and 2011.

However, that represents less than 3% of total defined benefit liabilities – which the report says “may indicate that, subject to market capacity and affordability, risk transfer deals could increase in the future”.

Daniel continued: “Currently just 16% of defined benefit schemes are open to new members compared to 36% in 2007 with replacement defined contribution schemes attracting lower employer contributions.

“Since the individual member assumes all the risk in a defined contribution scheme, it will be important that employees are helped to understand and make informed decisions about what is needed to ensure their future pension provision provides for a comfortable retirement.”

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