Issued By:
Rob Dwyer
Towers Perrin
(020) 7170 3569
rob.dwyer@towersperrin.com

Nearly half UK companies to change pension plans in next three years

The rapidly changing pace of the pension arrangements offered by UK companies is set to continue in the next three years, according to a new survey of DC pensions by Towers Perrin, the global benefits consultancy.

While the survey of 186 of the FTSE350 companies confirms there has been a massive migration from defined benefit pension funds to defined contribution schemes, there is still more change to come: 45% of companies say they will make significant change to their pension arrangements in the next three years, with 51% of those companies planning to integrate pensions into a wider flexible benefits programme. A number are also considering a switch from DB to DC for existing employees as well as just new hires.

Surprisingly, one-quarter (24%) of all companies say they are considering, or would consider, introducing a cash alternative to pension arrangements as an option for employees, while 14% of companies are considering, or would consider, a cash alternative to a pension scheme as a company-wide policy.

"The high level of interest in offering cash instead of a pension plan is a direct consequence of the current move to individual employee responsibility," says Peter Routledge, partner at Towers Perrin. "We might even look back at the present move to DC as a stepping stone from the DB promise of pension in retirement to simply giving employees more cash now. This reinforces the need for employees to receive better financial education to avert poverty in old age."

The survey also highlights the migration away from defined benefit (DB) pension provision to DC arrangements in the UK. Sixty-five per cent of respondent companies now offer new employees occupational DC pensions, compared with 28% in 2002. Only 27% of companies now offer DB pensions to new hires.

The survey reveals that the average employer contribution rate to defined contribution pensions in the UK has risen to 7.5% of pensionable pay in 2004 from 6.2% in 2002. The rise in the average contribution rates may be because very large employers are now switching to DC. The rise may also indicate that employers are looking to make their DC plans more attractive to existing employees as well as new hires.

And while the average contribution rate has risen, the contribution rate made by companies to different levels of employee varies widely, with the average contribution for senior managers at 11%, falling to 7% for lower ranking staff. "One of the main reasons for this variation is because DC arrangements for senior managers are replacing more valuable DB commitments at the senior employee level," says Routledge. "Companies are also more open to individual negotiation of pension design and contribution rates for senior managers, which also increases contribution rates."

For further information:
Rob Dwyer, Media Relations Towers Perrin, 020 7170 3569

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