- FTSE350 companies with a DB scheme contributed £14.4bn to those schemes in 2021, £4.8bn more than they contributed to their DC schemes
- In the 10 years since auto-enrolment, DC contributions have almost tripled in those companies (£3.7bn to £9.6bn), whilst DB contributions have remained broadly similar (£14.2bn to £14.4bn)
- Looking forwards, DB contributions are likely to fall, with DC contributions expected to steadily increase; as such, Barnett Waddingham predicts that the former will overtake the latter within 5 years
New research from Barnett Waddingham reveals that FTSE350 companies with defined benefit (DB) pension schemes are still paying more into said schemes than their defined contribution (DC) counterparts.
As auto-enrolment hits its 10th year, more than 12 million Brits in the private sector are saving into a DC pension scheme . Meanwhile, just under 1 million are active members in private sector DB schemes.
FTSE350 companies with a DB scheme contributed £14.4bn to those schemes in 2021. Of this, £9.8bn is used to pay down past service deficits; largely paying for the historic promises made to ex-employees. The remaining £4.6bn relates to DB pension accrual – that is, building up DB pension for current employees. The total figure has stayed roughly steady over the past decade; in 2012 it was £14.2bn, with some fluctuation in the interim.
Meanwhile, DC contributions by those companies in 2021 totalled £9.6bn. This has increased steadily over the past decade since auto-enrolment legislation was introduced in 2012, when DC contributions were £3.7bn. However, it remains just 40% of the total pension costs of these companies.
The DB scheme deficit contribution figure for 2021 is skewed slightly by a large one-off contribution paid by Tesco (£2.5bn), but this continues a trend from previous years of large one-off contributions being paid to reduce DB scheme deficits.
"The pension contributions for the FTSE350 companies with DB schemes provides a stark illustration of the enduring intergenerational fairness debate."
Looking to the future
DB deficit contributions should fall over the coming years if the recent improvement in funding positions remains, reducing the need for companies to plug DB scheme deficits. Barnett Waddingham’s most recent DB End Gauge index, which calculates an estimate of the average time for the FTSE350 DB pension schemes to reach a sufficient level of funding to buyout their liabilities with an insurance company, revealed an average time of 6.8 years at the end of August 2022 .
The absolute cost of funding DB pension accrual is also expected to shrink in the future if bond yields remain at similar levels (reducing the cost of DB pension accrual), and as the remaining DB scheme members leave active service.
In the absence of any further regulatory changes to boost statutory minimum contributions, the level of DC contributions is likely to stay largely static over the coming years. Further increases in workforce numbers and wage increases may push up the absolute value of these figures, but increasing financial pressures from the cost-of-living crisis could increase the number of pension scheme opt outs if current budget constraints make pension saving less of a priority.
Given these factors, and in current financial market conditions, Barnett Waddingham predicts that DC contributions will overtake DB contributions within the next 5 years.
Simon Taylor, Partner at Barnett Waddingham, comments: “The pension contributions for the FTSE350 companies with DB schemes provides a stark illustration of the enduring intergenerational fairness debate. In aggregate, these FTSE350 companies paid more to clear DB pension deficits over 2021 than the amount paid to fund DC pension savings for current employees. Despite the success of auto-enrolment, it is extraordinary that the promises made to (generally) former employees continues to account for higher expenditure than pension saving for current staff.
“Current DC members exist in a different financial reality, with a starkly different retirement outlook to current DB members. For companies with both DB and DC schemes, they must consider all of their stakeholders and decide upon the fairest and most prudent allocation of resource moving forwards.
“Crucially, if DC contributions remain at their current low levels, or worse, fall in light of the cost-of-living crisis, companies could find themselves with a cohort of workers who are unable to retire when they should.
“Companies must lean on data & analytics to assess the pension arrangements for current employees, how this might develop over time, and consider whether the current offering is appropriate. They might also want to think about an overall “pension budget” based on their current total pension spend, and consider what the best use of this capital will be as DB pension costs naturally fall away over time.”