Employers' pension provision 1998
A hard copy of this report summary can be obtained by contacting Paul Noakes [E-Mail: Paul.Noakes@dwp.gsi.gov.uk] or by writing to him at the 'Social Research Division, Department for Work and Pensions Security, 4th Floor, Adelphi, 1-11 John Adam Street, London WC2N 6HT'.
Research Report No. 123
By Jon Hales and Nina Stratford
The 1998 Survey of Employers' Pension Provision is the third in a series of surveys commissioned by the Department of Social Security (DSS) to investigate the extent and nature of pension provision by private sector organisations in Great Britain. The survey up-dates the picture provided by surveys conducted in 1994 and 1996.
- There was little change in the size and employment profile of private sector organisations between 1996 and 1998. The overwhelming majority of employers (93 per cent) were small organisations (with fewer than 20 employees), although most employees (67 per cent) worked in larger organisations (with 20 or more employees).
- A third of organisations (34 per cent) made some pension provision in 1998. This was slightly less than in 1996 (38 per cent). The comparison should be treated with caution due to biases that may exist in the representation of small organisations in the survey.
- Employer contributions to personal pensions were the most common form of provision by organisations in both years. In 1998, 38 per cent of larger organisations had two or more types of pension provision. Multiple provision was very rare in small organisations.
- In 1996 and 1998 the percentage of employees in larger organisations with some provision did not change (90 per cent and 89 per cent respectively). Among small organisations the percentage of employees in organisations with some provision reduced from 42 per cent in 1996 to 38 per cent in 1998.
- Most respondents (87 per cent) were aware of the Pensions Act 1995 requirements giving scheme members the right to select at least one third of their trustees or to approve an alternative arrangement. Half of schemes (52 per cent) did not have any member-nominated trustees, but at the time of the survey not all schemes would have completed their member-nominated trustee arrangements.
- The Minimum Funding Requirement (MFR) introduced by the Pensions Act 1995 came into effect from April 1997. Trustees must have details of their first valuation under the MFR no later than April 2001. At the time of the survey (1998), 34 per cent of defined benefit schemes and COMBS had had a MFR valuation, although over half of these were unable to say what the result had been.
- The majority of larger organisations (81 per cent) were aware of legal requirements to value accrued pension rights using the Cash Equivalent Transfer Value (CETV). The majority of larger organisations (82 per cent) had not received any requests for CETVs in the 18 months prior to the survey. Ten per cent of larger organisations had received a request for a CETV for divorce purposes. Half of these had received a single request in the previous 18 months.
- At the time of the survey, the Government had not published its detailed proposals for Stakeholder Pensions. Organisations without pension provision were asked about their awareness and likely action on Stakeholder Pensions. A quarter (25 per cent) of non-providing small organisations and 31 per cent of non-providing larger organisations had heard of stakeholder pensions.
- A quarter (25 per cent) of small non-providing organisations were 'definitely' or 'maybe' willing to provide access to Stakeholder Pension schemes, as were 36 per cent of larger non-providing organisations.
Research design
The surveys in 1994, 1996 and 1998 covered private sector organisations in Great Britain. The sample was drawn from the Dun and Bradstreet database of private sector head offices and was weighted to the profile of the 1998 Inter Departmental Business Register (IDBR). Part of the sample from the 1996 survey (430 cases) was retained in 1998 to allow changes in provision to be verified.
The overall response rate for the survey was 72 per cent. The results of the survey are presented separately for smaller organisations (with fewer than 20 employees) and larger organisations with 20 or more employees.
The incidence of pension provision
One third (34 per cent) of private sector organisations had some form of pension provision in 1998. This is slightly lower than in 1996 (38 per cent). The difference between these estimates is statistically significant.
Larger organisations were more likely to provide pensions than small organisations. In 1998, 98 per cent of organisations with 1,000 or more employees provided pensions compared to 25 per cent of organisations with fewer than six employees.
Types of pension provision
Contributions to personal pensions were the most common form of private sector provision in 1998. Thirty per cent of larger organisations (with 20 or employees in Britain) provided them. Having a group personal pension plan was almost as common, with 26 per cent of larger organisations providing them.
Defined benefit schemes were offered by 13 per cent of larger organisations. One in ten (10 per cent) offered defined contribution schemes and another 10 per cent had top hat schemes. Closed occupational schemes were reported by 5 per cent of organisations and Contracted Out Mixed Benefit Schemes (COMBS) had been established by 1 per cent of organisations. These schemes allow members to be contracted out of SERPS on a defined contribution basis and others on a defined benefit basis within the same scheme, while also allowing transfers between the two parts of the scheme.
There were some changes since 1996 in the types of provision. The incidence of larger organisations with group personal pensions had increased from 19 per cent in 1996 to 26 per cent in 1998, while the proportion of larger organisations with defined benefit schemes had decreased from 19 per cent to 13 per cent.
Between 1996 and 1998 the percentage of employees in larger organisations making some pension provision did not change (90 per cent and 89 per cent respectively). Among small organisations the percentage of employees in organisations with some provision reduced from 42 per cent in 1996 to 38 per cent in 1998.
In 1998, half the employees (50 per cent) in larger organisations worked in organisations with a defined benefit scheme compared to 60 per cent in 1996. Part of this difference may be accounted for by the introduction of COMBS. In 1998, six per cent of employees worked in organisations with this new type of scheme. There had also been increase in the proportion of organisations with a group personal pension, in addition to an occupational scheme. Among smaller organisations, the most common form of provision was employers' contributions to personal pensions (20 per cent in 1996 and 21 per cent in 1998).
Main type of pension provision
In 1998, group personal pensions were the most common main provision (31 per cent) among larger organisations (with 20 or more employees). Employers' contributions to personal pensions were the main type of provision in one quarter (25 per cent) of larger organisations. Defined benefit schemes were the main form of provision in one organisation in five (21 per cent). Defined contribution schemes were the main form of provision in 16 per cent of larger organisations.
Among smaller organisations, the type of provision with the largest number of active members was employers' contributions to personal pensions. This type of provision was estimated to cover 38 per cent in 1996 and 51 per cent of active members in 1998.
Multiple provision
In 1998, among larger organisations, 63 per cent had a single type of pension scheme or arrangement and 38 per cent had two or more types of provision. These accounted, respectively, for 44 per cent and 56 per cent of the active membership of schemes or arrangements. The most common sole arrangements were employer contributions to personal pensions (23 per cent) or a group personal pension arrangement (16 per cent). Rather fewer larger organisations with a single type of provision had occupational schemes. Only one in 10 larger organisations (11 per cent) provided pensions solely through a defined benefit scheme and only 6 per cent provided pensions solely through a defined contribution scheme.
Among larger organisations with multiple provision, the most common combination was in the form of contributions to personal pensions or a group personal pension plan, combined either with each other (10 per cent) or with an occupational scheme (21 per cent).
Compared with the 1996 survey, multiple arrangements had increased from 23 per cent to 38 per cent in 1998. More organisations offered group personal pension schemes in 1998 than in 1996, either combined with an occupational scheme or with contributions to personal pensions.
Multiple provision was relatively uncommon among smaller organisations (nine per cent in 1996 and 1998). The most common arrangement was employers' contributions to personal pensions and a group personal pension (four per cent).
Coverage of pension provision among employees
In 1998, two fifths (40 per cent) of private sector employees worked in larger organisations with a single form of pension provision. A slightly larger percentage (50 per cent) of the workforce was in organisations with multiple types of pension provision. The remaining 11 per cent were in organisations with no pension provision.
The relatively substantial size of organisations with occupational schemes means that they accounted for a relatively large share of all private sector employees in larger organisations in 1998. One fifth (22 per cent) of employees were in an organisation whose sole form of provision was a defined benefit scheme. The form of multiple provision that accounted for the largest proportion of the workforce was a combination of an occupational scheme and another form of provision such as top hat or group personal pensions.
This pattern was replicated in terms of the location of active members. Just under a third (30 per cent) of active members in larger organisations were found in organisations which operated a defined benefit scheme as the sole form of provision. Among larger organisations with multiple types of provision, nearly three fifths (56 per cent) of the employees were active members of a pension scheme or arrangement.
Among smaller organisations, one-third (32 per cent) of employees were in an organisation with a single type of provision, 5 per cent in an organisation with multiple provision and 63 per cent in an organisation with no pension provision.
Non provision
In 1998, two thirds (66 per cent) of private sector organisations did not offer any pensions for their employees. The great majority of these organisations (97 per cent) had fewer than 20 employees.
The most common explanation for not providing pensions, given by half (50 per cent) of all non-providers, was that the organisation was too small. Even among non-providers with 50 employees or more, one in six (15 per cent) mentioned this factor. Larger non-providers (with 20 or more employees) tended to refer to reasons such as cost, lack of interest among their workforce or a high rate of staff turnover.
The nature of pension provision in large organisations
Occupational pension schemes
Occupational schemes were found predominantly in larger organisations - only one in twenty was found in smaller organisations. Among larger organisations, three quarters (74 per cent) of the occupational schemes were open to new members and accounted for 94 per cent of active members overall. The others were closed (12 per cent) but still had contributions for existing members, or were frozen (12 per cent) meaning that no further contributions were allowed. The frozen schemes are excluded from the subsequent analysis.
Among schemes belonging to larger organisations, 29 per cent were open defined benefit schemes. More than two thirds (68 per cent) of active members were in a defined benefit scheme, which tended to be found in the larger organisations. Just under a quarter of schemes (23 per cent) were defined contribution schemes and these accounted for 15 per cent of active members. COMBS, which could only be established from April 1997, represented only 2 per cent of schemes and had 8 per cent of the active members.
Eligibility and membership profile
The majority of defined benefit (82 per cent) and defined contribution schemes (65 per cent) were open to all employees. Where membership was restricted in some way, it was most commonly limited to white collar or 'staff' employees. Organisations with multiple provision were less likely to provide schemes that were available to all sections of the workforce.
Three fifths of active members were men, and two fifths were women (39 per cent), reflecting the profile of the workforce in such organisations. Part time employees (working less than 30 hours per week) represented some 7-8 per cent of the workforce in organisations with occupational schemes, but only 4 per cent of the active scheme members.
Relationship to the State Earnings Related Pension Scheme (SERPS)
Just over half the occupational schemes (54 per cent) were not contracted out of SERPS. Two in five schemes were fully contracted out (42 per cent) and the remainder were partly contracted out (four per cent).
Contributions
In most occupational schemes both employers and employees made contributions. Contributions from employees were required in 83 per cent of open defined benefit and 90 per cent of defined contribution schemes.
In most defined benefit schemes (88 per cent), the basis of members' contributions was a fixed percentage of pensionable pay. Most of the others (10 per cent) had two or more contribution rates for different categories of employees.
Where there was a fixed percentage rate for members' contributions, it was slightly higher, at five per cent, for defined benefit than for defined contribution schemes (four per cent). The median contribution rate for employers was higher for defined benefit schemes (11 per cent) than for defined contribution schemes (five per cent). Two thirds (69 per cent) of the employers with defined benefit schemes' were contributing at the normal rate, while 12 per cent had increased the rate, seven per cent reduced the rate and 12 per cent were on a contributions holiday.
Benefits
Most respondents classified occupational schemes as either salary related or money purchase, but 15 per cent of schemes calculated members' benefits using both methods. About a quarter of these latter schemes (27 per cent) had started to do this in the last five years. Among the main reasons given were that it was financially advantageous for the employer (10 per cent) or for the employee (seven per cent) or more flexible for the employer (13 per cent) or for the employee (four per cent). Of these schemes, 63 per cent generally calculated benefits on a salary related basis and 33 per cent on a money purchase basis.
Scheme administration and tax status
Occupational schemes are managed either on an 'insured' or on a 'self-administered' basis. In 1998, more than half (56 per cent) of the occupational schemes were insured, with smaller schemes much more likely to be insured than large ones. Most (74 per cent) schemes with fewer than 12 members were insured, compared with only five per cent of those with 1000 or more members. Over seven in ten defined contribution schemes were insured, compared with a quarter of defined benefit schemes (26 per cent) which were more likely to be self-administered.
Ten per cent of the occupational schemes were industry-wide rather than managed by a specific organisation, particularly in banking, finance and business services (16 per cent) and the public sector (20 per cent) (defined as 'other services' in the Standard Industry Classification).
Retirement age and gender equality
Equal retirement ages for men and women applied in 84 per cent of defined benefit schemes and three quarters (76 per cent) of defined contribution schemes.
Trustees and directors
Two thirds of schemes (63 per cent) had a board of individuals as its trustees. One third (30 per cent) had a trustee company, with one or more directors acting in the same way as a board of individual trustees.
Where the number of trustees was known, the majority had three (25 per cent) or four or more (34 per cent). Defined benefit schemes tended to have larger boards of trustees than defined contribution schemes. Nearly all (95 per cent) of the occupational schemes with 1,000 or more members had four or more trustees.
Four fifths of occupational schemes (78 per cent) had one or more members of the scheme on the board of trustees. This was more likely to be the case with defined benefit schemes (85 per cent) than defined contribution schemes (67 per cent).
The Pensions Act 1995 gave scheme members the right to select at least one third of their trustees or to approve an alternative arrangement. Most respondents (87 per cent) were aware of this legislation, especially in the largest organisations (with 100 or more employees). Half of schemes (52 per cent) did not have any member-nominated trustees, but at the time of the survey not all schemes would have completed their member-nominated trustee arrangements. The most common alternative was for the employer to have members' approval for a different arrangement (45 per cent).
Financial situation
Self investment was rare, being reported for four per cent of defined benefit schemes and COMBS.
The Minimum Funding Requirement introduced by the Pensions Act 1995 came into effect from April 1997. Trustees must have details of their first valuation under the MFR no later than April 2001. In 1998, one third (34 per cent) of defined benefit schemes and COMBS had had an MFR valuation, but another fifth (19 per cent) of respondents did not know whether an MFR valuation had been carried out.
Knowledge of actuVerdana valuations was more widespread than of MFR valuations. Most salary related schemes and COMBS (80 per cent) were in surplus. One in ten (10 per cent) was underfunded and the other one in ten (10 per cent) had assets equal to their liabilities. Underfunding was more prevalent among closed schemes than open ones.
Half (50 per cent) of the underfunded schemes did not propose to take any action. Among schemes which were taking or intended to take action, the most common measures were increased employer contributions (33 per cent) or a cash injection (16 per cent).
Three fifths (58 per cent) of schemes in surplus had no plan to change the level of contributions. One in five (19 per cent) schemes in surplus had reduced employer contributions and one in ten (10 per cent) stopped them. Action in cases of underfunding or surplus was most common among larger schemes, though this is based on a limited number of cases and should be treated with some caution.
Group personal pensions and employers' contributing to personal pensions
Most group personal pensions and contributions to personal pensions were found in small organisations. Where employers contributed to personal pensions, 91 per cent of such arrangements were found in organisations with fewer than 20 employees.
Many group and personal pension arrangements were established very recently. Among organisations with 20 or more employees, one quarter (27 per cent) of group personal pension arrangements had been set up since the beginning of 1997. One in eight (12 per cent) organisations contributing to personal pensions had started to do so in the same period.
Membership
Among larger organisations, most (61 per cent) arrangements where the employer contributed to personal pensions were for fewer than five employees. Group personal pension arrangements had more members, three fifths (62 per cent) of them having more than 12.
Personal pensions and SERPS
A personal pension contracted out of SERPS is called an Appropriate Personal Pension (APP). Among larger organisations where it was known how many employees had APPS, two fifths (38 per cent) reported that all of the employees held APPs and another one-fifth (18 per cent) said that some did. The remaining two-fifths (45 per cent) of larger organisations reported that no employees had an APP. However, two fifths of respondents were unable or refused to say how many employees held APPs.
The picture was similar among small organisations, except that slightly more said that all employees held APPs (45 per cent) or that none did (49 per cent) and fewer had just some employees with an APP (6 per cent).
Contributions
Many respondents were unable to give details of employer's contribution rates for group and personal pension arrangements. Where reported, the median contribution rate in large organisations was 5 per cent for group personal pensions and 6.5 per cent for contributions to personal pensions. In small organisations, the median rates were 10 per cent and 7.9 per cent respectively.
Occupational schemes and divorce
The Pensions Act 1995 introduced provisions which require courts to take pension rights into account when making awards in divorce cases.
Valuations of pension rights
Pension schemes provide a valuation of the members rights based on the 'cash equivalent transfer value' (CETV). The majority of larger organisations (81 per cent) were aware of requirements to value accrued pension rights using the Cash Equivalent Transfer Value (CETV).
In larger organisations, most schemes had not had any experience of valuing pension rights using the CETV. However, nearly half (47 per cent) of the largest organisations (with five hundred or more employees) had had such a request, compared with only four per cent of the smallest.
In larger organisations, one in 10 schemes (10 per cent) had had a valuation request related to divorce. For half of these schemes, this had been a single request over the past 18 months.
Attachment/Section 12A orders
Two-thirds (64 per cent) of respondents in organisations with 20 or more employees said they were aware of the requirement that courts can make financial provision for a former spouse through an attachment order.
Recent and expected changes to pension provision
New providers
Among larger organisations which provided pensions in 1998, one in five (22 per cent) had started to make pension provision in the five years prior to the survey. New providers tended to be young organisations and just over a third (35 per cent) had been established in the 1980s. However, more than one in three (37 per cent) of the new providers had been established prior to 1980. Five out of six (87 per cent) new providers among larger organisations had between 20 and 99 employees.
The larger new providers predominantly chose to contribute to personal pensions (38 per cent), group personal pensions (26 per cent) or both (nine per cent). Very few larger providers in the last five years chose to set up occupational schemes, and those that did so were virtually confined to the very large organisations (500 or more employees).
Overall, about nine out of ten new providers of pensions in the previous five years were small organisations.
Among smaller organisations, one in three of the providers had started to make provision in the previous five years. They predominantly chose to make contributions to personal pensions (57 per cent), but around one in ten did so through a group personal pension (11 per cent) or a defined benefit scheme (11 per cent).
Additional provision
One in ten organisations making pension provision prior to 1993 had added to their pension arrangements by 1998. Contributions to personal pensions or group personal pension arrangements accounted for three-fifths (62 per cent) of these cases (60 per cent of them APPs and 40 per cent of them group personal pensions) while one third (31 per cent) involved an occupational scheme. A few organisations (seven per cent) added both personal pensions and occupational provision.
Scheme closures
A few organisations reported having closed one or more of their occupational schemes in the recent past. This was almost always by closing the scheme to members. Only a handful of these closures had taken place in the five years prior to the survey, two out of three of them involving defined benefit schemes.
The intentions of non-providers
One in three larger non-providing organisations (35 per cent) had seriously considered providing some sort of pension arrangements for employees. The percentage of larger organisations which had done so varied little by size. Where pension provision had been considered, half of the respondents (48 per cent) thought it was likely that they would introduce pension provision in the following five years. Of the smaller organisations, only one in five (20 per cent) of the non- providers had considered making provision.
Expected changes in the type of pension provision
Among organisations with an occupational scheme or which contributed to personal pensions, about one in ten (11 per cent) had considered moving to a group personal pension to replace their current provision. A similar percentage of organisations with a group personal pension or an occupational scheme had considered making contributions to personal pensions.
Stakeholder pensions
Respondents in all non-providing organisations were asked about the proposed Stakeholder Pensions, although at the time of the survey, the Government had not published detailed proposals for the scheme.
Three fifths of all non-providers (59 per cent of smaller and 48 per cent of larger organisations) had not heard of Stakeholder Pensions. A further one in six (17 per cent overall, 16 per cent of smaller and 22 per cent of larger organisations) was aware, but did not know about them to any extent.
About one quarter of non-providers said they would be willing to provide access to Stakeholder Pensions. One in six (18 per cent) of the smaller organisations said they would 'maybe' do so, and seven per cent said they would 'definitely' do so. A quarter of respondents (24 per cent) said they were not sure, while the other half (50 per cent) said they would probably (20 per cent) or definitely (30 per cent) not become involved in providing access to stakeholder pensions.
Among larger non-providing organisations, a slightly higher proportion would 'maybe' provide access to stakeholder pensions (26 per cent), and ten per cent would 'definitely' do so. These respondents were more likely to say they needed to know more (35 per cent), and as a result fewer said they would 'probably not' (14 per cent) or would 'definitely not' (16 per cent) provide such access.
Those respondents who said they would not voluntarily become involved in providing access to Stakeholder Pensions tended to cite the same reasons as they gave for their non-provision, in particular their small size, the company's circumstances and the cost involved.
Those respondents who expressed willingness to provide access were asked what in particular they would be willing to do. There was general willingness to provide information (43 per cent 'definitely' and 25 per cent 'maybe') and to arrange deductions from pay (39 per cent 'definitely' and '25 per cent 'maybe'). However, there was less widespread willingness to contribute to a scheme (17 per cent 'definitely' and 23 per cent 'maybe' or to be actively involved in its establishment (17 per cent 'definitely' and 18 per cent 'maybe').
Publication details
Hales, J. and Stratford, N. (September 2000) Employers' Pension Provision 1998, DSS Research Report No. 123, CDS: Leeds (£35.00)
Other relevant publications
Casey, B., Hales, J., and Millward, N. (1996) Employers' Pension Provision 1994, DSS Research Report No. 58, London: TSO (£30.00).
Dundon-Smith, D., Hales, J., Chetwynd, M., Thomas, A., and Keegan, J. (1997) Pension Scheme Inquiries and Disputes, DSS Research Report No. 66, London: TSO (£30.00).
Bunt, K., Howells, D., and Winterbotham M. (1998) Experiences of Occupational Pension Scheme Wind-up, DSS Research Report No. 75, London: TSO (£27.00).
Bunt, K., Winterbotham, M., and Williams, R. (1998) The Role of Pension Scheme Trustees, DSS Research Report No. 81, Leeds: CDS (£28.00).
Pratten, C., and Satchell, S. (1998) Pension Scheme Investment Policies, DSS Research Report No. 82, Leeds: CDS (£28.00).
Forth, J., and Millward, N. (1999) Employers' Pension Provision 1996, DSS Research Report No. 98, Leeds: CDS (£31.50).
Thomas, A., Pettigrew, N., Candy, S. and Hulusi, A. (2000) The Changing Role of the Occupational Pension Scheme Trustee, DSS Research Report No. 124, Leeds: CDS (£25.00)