According to the latest figures, membership of work-based pension plans is dropping. Alas, some workers are turning down free money...
The number of employees in work-based pension plans continues to fall, according to the Office for National Statistics (ONS). The latest Occupational Pension Schemes Annual Report from ONS revealed the following drop in membership from 2006 to 2007:
Number of members (million) | 2007 | 2006 | Change |
|---|---|---|---|
Employees | 8.8 | 9.2 | -0.4 |
Preserved pensions | 9.4 | 9.4 | - |
Pensions being paid | 8.5 | 8.2 | +0.3 |
Total | 26.7 | 26.8 | -0.1 |
As you can see, the total membership of occupational pension schemes is broadly unchanged. However, the number of employee members dropped by 400,000 between 2006 and 2007. Over the same period, the number of pensions being paid out increased by 300,000.
The relentless decline of private-sector pensions
What's particularly noticeable is that membership of defined-benefit (alias `final-salary') schemes continues to decline, thanks to private-sector schemes being closed. Between 2006 and 2007, private-sector membership of defined-benefit schemes fell by a tenth (10%), from 3 million to 2.7 million. However, in the public sector, where pensions are provided and guaranteed by the government, membership of defined-benefit schemes actually rose slightly, to 5.2 million.
Defined-benefit schemes are seen as the `gold standard' of occupational pensions. The pension a member receives is based on his/her length of service and earnings, usually at the point of retirement. Although a few defined-benefit schemes have collapsed in recent years, they are still viewed as `guaranteed' pension plans.
On the other hand, members of a defined-contribution scheme (also known as a money-purchase scheme) enjoy no such guarantees. Their pensions depend on contribution levels, investment returns and the annuity rates in force when they convert their investment funds into income.
Of course, defined-benefit schemes cost employers a lot more to run, largely because of the high price of providing guaranteed pensions. Therefore, as you can see from the table below, contribution rates to defined-benefit schemes are far higher:
Average contribution rates to private-sector pensions in 2007
Contribution rates (% of salary) | Defined-benefit Schemes | Defined-contribution schemes |
Employers | 15.6 | 6.5 |
Members | 4.9 | 2.7 |
Total | 20.5 | 9.2 |
Given the high cost of providing defined-benefit schemes, it's no wonder that thousands have been closed to new (and even existing) members, particularly in the last ten years. So, if your employer provides you with a final-salary pension scheme, then you should count yourself lucky, as this benefit is usually worth more than a fifth (20%) of your before-tax salary!
Are you turning down free money?
In 2007, there were 29,000 occupational pension schemes still open to new members, not including group stakeholder schemes. The law requires employers with five or more employees to provide their workers with some form of pension scheme, with the minimum being a basic stakeholder pension. At present, employers are not obliged to contribute to these schemes, but this is set to change with the introduction of Personal Accounts in 2012.
In the meantime, if you are free to join your employer's pension scheme, but have yet to do so, then you may be turning down `free' money. For example, a monthly contribution of 5% of your wage could cost just 3% to 4% after taking tax relief into account. What's more, by joining the scheme, you may receive contributions for your employer, which will boost your pot yet further, plus life insurance and other benefits.
For example, take the young graduate I met recently who had just started his first full-time job. He asked me whether it would be worthwhile contributing to his employer's defined-contribution pension scheme. On discovering that his 5% contribution would be matched by 10% from his employer, I urged him to join without delay. After all, what other investment would triple his money on day one?
In summary, if you want to improve your future financial security, then look into joining your occupational pension scheme. It could be the best financial decision that you ever make!
More: Learn more about retirement and pensions | Save Your Retirement Savings | Get 12% More From Your Pension