On the go: The expected decline of sponsor contributions towards defined benefit pension schemes should see businesses’ defined contribution payments outstrip these within five years, according to new research.
FTSE 350 companies with DB schemes paid £14.4bn in contributions last year, which compares with £9.6bn paid into their DC schemes over the same period, according to Barnett Waddingham
Of the £14.4bn paid into DB schemes, £9.8bn was used in deficit repair contributions. The remaining £4.6bn was linked to pension accrual.
The overall payments into these pension funds have remained relatively constant over the past decade, sitting at £14.2bn in 2012. The figure for 2021 was skewed by a one-off contribution of £2.5bn made by Tesco.
However, the advent of auto-enrolment has, unsurprisingly, triggered a surge in employer DC contributions. Businesses’ outlays on these schemes have almost tripled to £9.6bn from £3.7bn in 2012, when the pensions policy was introduced.
Nevertheless, expenditure on DC remains just two-fifths of FTSE 350 companies’ pension costs, Barnett Waddingham noted.
But the consultancy predicted that DC contributions will overtake DB in five years. Funding levels are currently healthy, with the aggregate surplus of schemes eligible for Pension Protection Fund entry jumping by a quarter in August to £313.8bn.
Barnett Waddingham recently forecast that, on average, it will take FTSE 350 DB schemes 6.8 years to reach sufficient funding for a buyout of their liabilities by an insurer.
Some pension industry commentators have, meanwhile, campaigned for the minimum level of DC pension contributions to be raised to 12 per cent of qualifying earnings from its current level of 8 per cent.
“The pension contributions for the FTSE 350 companies with DB schemes provides a stark illustration of the enduring, intergenerational fairness debate,” said Barnett Waddingham partner Simon Taylor.
“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,” he continued.
“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.”
