Defined contribution (DC) pensions have become the ‘new normal’ for Britain’s largest companies with 98% of new employees in the FTSE 350 enrolling in such schemes, Willis Towers Watson has discovered.
A survey by the consultant also found that average payments into DC schemes at FTSE 100 companies have quadrupled in the past eight years. During this time, the average assets held in those schemes have increased sevenfold.
Half of blue chip companies (54%) offer defined benefit (DB) schemes to existing members. This is, however, down from 84% in 2009, highlighting the growing popularity of its DC counterpart. Around a quarter (27%) of FTSE 250 companies offer a DB scheme to existing members.
But while DC pensions have ‘come of age’, Willis Towers Watson suggests that the market has some growing up to do. It points to better delivery vehicles and contribution methods as well as member education and support as areas that need work.
The emergence of master trusts, introducing wider savings options, improving investment strategies and providing enhanced member information could help improve the system.
Willis Towers Watson senior consultant Richard Sweetman said the survey highlights the speed with which DC provision is dominating the UK pension market.
“It also offers a valuable insight into the issues that are still to be addressed in ensuring this historic shift leads to better retirement outcomes for millions of tomorrow’s pensioners,” he added.
JP Morgan Asset Management UK defined contribution vice president Annabel Tonry echoes Sweetman’s comments saying that it’s crucial to get contribution levels and the investment strategy in DC schemes right.
“In the current lower return environment, which looks set to last for a long time, DC plans are going to have to focus on the now much harder task of achieving the same levels of returns for their members – asset allocation and diversification will be key,” she added.
Other findings include 46% of FTSE 100 companies enrol more of their staff into a DC scheme than is required under automatic enrolment rules, while the use of master trusts among FTSE 350 companies has almost doubled to 15% since 2015.
