Figures published by the Office for National Statistics today mark a historical turning point for membership of workplace pension schemes, according to Towers Watson.

The pensions tables from the ONS’s Annual Survey of Hours and Earnings 2013 also highlight that public sector employees are almost ten times more likely to be in defined benefit schemes than private sector employees are.

Automatic enrollment making pension saving the new norm

After sinking to a historical low of 32 per cent in April 2012, the proportion of private sector employees saving in any kind of workplace pension increased to 36 per cent in April 2013. Including the public sector, half of all employees were saving in a workplace pension in April 2013.

John Ball, head of UK Pensions at Towers Watson, said: “When this snapshot was taken, only the biggest employers in the country were legally required to automatically enroll people into pensions. Today, you’d get a healthier picture. The size threshold for employers who must comply with the automatic enrollment rules has come down from 6,000 workers then to 250 now1.

“Although most people work for large and medium-sized employers, membership of their pension schemes was higher to begin with. So it will take time for automatic enrollment to really turn things around, and not everyone will be enrolled even then – around one quarter of workers assessed so far were either too young, too old or earning too little2.

“All the signs are that 90 per cent or more of the people who are nudged into a pension scheme are staying in it. That’s not just down to people taking the path of least resistance. Many will feel relieved that something is being done about their retirement savings, and it was always going to be rare for employees to sign a form saying that the employer can keep its pension contribution.

“The default contribution rates were never supposed to be enough, so it’s dangerous for people who have been automatically enrolled to think that everything is being done for them. It’s common for employers to match extra money that employees pay in, but many of the people not opting out won’t be opting up either. Just going with the flow can often mean leaving money on the table.”

Defined benefit provision – a tale of two sectors

As recently as 1997, one in three private sector employees were building up new entitlements to salary-related pensions. By 2013, this had fallen to around one in 12.

John Ball said: “Where schemes have closed to new entrants, staff turnover will gradually erode the number of members adding to their defined benefit pensions – even where employers do not shut the scheme altogether. There is a stark contrast with the public sector, where 80 per cent of employees are in defined benefit schemes and the Government has said that the cost should not be trimmed further for another 25 years.

“Some companies put decisions about the future of their defined benefit scheme on the back burner while they implemented automatic enrollment, but the Government’s State Pension reforms could be a catalyst for change. National Insurance rebates worth a maximum of £1,169 per employee3 will disappear from 2016, so employers will have to choose between swallowing this cost, modifying their scheme, or closing it altogether.

“With traditional final salary schemes largely consigned to history, the Government has talked about giving employers more freedom to come up with halfway house designs as an alternative to defined contribution plans. There is a Catch 22 situation here: the Government is unlikely to prioritise changing the law without employer demand, but employers will not spend time exploring options that aren’t even legal. ”

Source: Actuarial Post (UK)