New research undertaken by Old Mutual Wealth with YouGov shows that the UK is reaching a tipping point where savings in defined contribution (DC) pension schemes become more prevalent for retirement income than final salary (or defined benefit) pension schemes.
Defined benefit, otherwise known as ‘final salary’ schemes, were popular in the past but are now largely confined to the public sector. They offer employees an annual retirement income which is guaranteed for life by the employer. Those without access to a DB scheme have to personally save into a ‘defined contribution’ scheme, alongside of any contributions made by their employer, building a savings pot by investing in the stock-market and using the savings to generate their own income in later life.
Just 34% of those aged 50+ who are not yet retired (‘pre-retirees’) expect some of their retirement income to be provided from benefits built up within a final salary scheme, down 3% in a year. This compares to 50% of those already retired where some retirement income is provided through previous membership of one or more final salary schemes.
For those in the run-up to retirement, pension savings built up through defined contribution funds are now almost as common as those from final salary schemes, with 32% of the pre-retirees expecting to use DC money to fund their life after work. This is up 3% in a year and compares to only 24% of current retirees who fund a proportion of their retirement income from a DC scheme. (See table 1 below)
At this current rate, more UK pensioners will expect to fund some of their retirement income from DC schemes than final salary schemes for the first time this year.
Table 1: Data from YouGov/Old Mutual Wealth 22/29 March 2016
The decline of the UK’s final salary pension schemes has been well-publicised recently following the difficulties engulfing Tata Steel and BHS. These have brought the country’s historic reliance on final salary pension schemes into stark focus and have further highlighted the need for people to take personal responsibility for their own retirement.
The Government’s auto-enrolment initiative, which has seen almost 9m people start paying into a DC pension alongside their employer, is making a difference, meaning the vast majority will one day retire with pension savings in one or more DC schemes. ONS data from the Occupational Pension Schemes Survey 2014 showed that private sector membership of DC schemes jumped from 1.2m in 2013 to 3.2m in 2014.
However, current contribution levels are low and alone will not substitute for the decline of benefits that can be provided from final salary pensions.
Adrian Walker, retirement planning manager at leading wealth manager and investment platform, Old Mutual Wealth, comments:
“Final salary pension schemes are a luxury that many businesses can no longer afford. Our YouGov data shows we are approaching the beginning of the end for this type of scheme in the private sector. As soon as this year, more people nearing retirement will be members of a defined contribution scheme than defined benefit for the very first time.
“While many of today’s workers and recent retirees will look at those retiring on these generous deals with envy, last year’s pension reforms and the recent travails of Tata and BHS may have made some people question whether pensions previously built up in their final salary scheme is the right choice in terms of delivering future income needs. With the advent of the pension freedoms and the increasing numbers of individuals who are now focusing on their retirement plans and how their pension savings may help deliver the outcomes they seek, we have seen applications for our transfer value analysis service, which assesses the benefits of transferring a final salary scheme to an alternative scheme, more than triple in the last year.
“This shows more people taking responsibility for their own circumstances and while auto-enrolment is a good start for anyone thinking about saving for their retirement, you should not be fooled into thinking it will solve the problem on its own. Contributing above the minimum requirement is a good move but in general, setting a goal each month and spending what you have after saving, rather than saving what’s left after spending is a good mantra to have.
“I also hope that the government’s regular tinkering with the system, including the recent announcement of the Lifetime ISA, does not detract from this focus on putting money aside for long-term retirement income needs.”