'Chapter 4: Contributions' of the Occupational Pension Schemes Survey (OPSS) annual report 2011 gives information on the estimated contribution rates to occupational pension schemes by scheme characteristics such as status, size and benefit structure.
This chapter presents the survey’s findings on contributions to occupational pension schemes. The workplace pension reforms will be staged in from October 2012, with the largest employers being staged in first. Employer and employee contributions will be phased in, rising to a minimum total contribution of eight per cent of a band of earnings by October 2018.
This chapter presents the estimates for 2011, prior to the implementation of these reforms. Generally, both members and sponsoring employers make contributions towards paying for the benefits provided by a pension scheme. The exact division of payments varies from scheme to scheme. However, some schemes remain non-contributory for members, while employers may be able to take a 'contribution holiday' from time to time in defined benefit schemes where the assessed cost tends to vary.
Most member and employer contributions are made as a percentage of salary, excluding bonuses. However, fixed amount payments can be made as part of the schedule of normal (or regular) contributions. Information on those making such payments was collected by the 2011 survey, and is included in Tables 4.5 to 4.8. On the other hand, when schemes make ‘special’ cash payments, for instance as part of deficit reduction, these payments are not considered normal contributions; information on such payments was not collected by the survey, so they are excluded from the analysis.
This chapter presents the results of questions about normal contributions. The results are for schemes with 12 or more members. For the private sector, the chapter looks at average contribution rates and how rates are distributed; it also looks at contributions by contracted out status, salary sacrifice and additional voluntary contributions. For defined benefit schemes, this chapter analyses the earnings on which contributions are paid. For defined contribution schemes, the chapter presents the findings on choice of investments available to members.
In surveys prior to 2010, the process for obtaining contribution rate information from schemes or sections of schemes was to ask for the prevalent rate of contribution from members and the sponsoring employer. Contribution rates may be the same for all members in the scheme, or there may be different rates for different groups of members. If there was more than one rate in previous surveys, schemes were asked for the rate which applied to most members.
As part of improvements to the 2010 survey, the questionnaire was redeveloped to capture cases where schemes (or sections) had groups of members with differing contribution rates. The 2010 questionnaire asked for the different rates and an estimate of the proportion of active members contributing at each of these rates. The same questions were asked as part of the 2011 questionnaire.
Weighted-average contribution rates across all schemes were calculated based on the estimates for numbers of active members contributing at each rate. For example, if a scheme had a group of 50 active members contributing at 4 per cent and another group of 100 active members contributing at 6 per cent, then the scheme’s weighted-average contribution rate would be 5.3 per cent.
Member contribution rates in defined contribution schemes often vary according to factors like age or length of service. The same is true of the employer’s contribution. Defined contribution schemes were asked about their contribution structures, and the results are also presented in this chapter.
It should be noted that the survey findings relate to the situation on 6 April 2011. They are based on schemes which were classified as either open or closed at this time. ONS does not recommend comparing the figures for 2006 and later years with figures for earlier years, because of changes in methodology. In this chapter, we present the results for 2006 to 2011 only (although, in some cases data for earlier years can be obtained by clicking on the table or graph). The changes to the questionnaire in 2010 described above mean that comparisons over time should be treated with caution.
In 2011, the average regular contribution rate to open private sector defined benefit schemes (excluding fixed amount payments) was 19.2 per cent. The average regular contribution rate to closed defined benefit schemes was 19.4 per cent. Figure 4.1 shows the breakdown for members and employers:
The average member contribution rate to open private sector defined benefit schemes was 5.1 per cent in 2011.
The average member contribution rate to closed private sector defined benefit schemes was 4.9 per cent in 2011.
The average employer contribution rate to open private sector defined benefit schemes was 14.1 per cent in 2011.
The average employer contribution rate to closed private sector defined benefit schemes was 14.5 per cent in 2011.
In 2011, the average regular contribution rate to open private sector defined contribution schemes was 9.2 per cent. The regular contribution rate to closed defined contribution schemes was 11.4 per cent. Caution should be exercised with the figures for closed defined contribution schemes as the sample of such schemes is relatively small. Figure 4.1 shows the breakdown for members and employers:
The average member contribution rate to open defined contribution schemes was 2.8 per cent.
The average member contribution rate to closed defined contribution schemes was 2.9 per cent.
The average employer contribution rates to open defined contribution schemes was 6.5 per cent.
The average employer contribution rates to closed defined contribution schemes was 8.5 per cent.
One clear difference between private sector defined benefit and defined contribution schemes is that contribution rates in defined benefit schemes are higher than in defined contribution schemes. Table 4.2 shows that in 2011, for defined benefit schemes in the private sector, the average contribution rate was 4.9 per cent for members and 14.2 per cent for employers. For defined contribution schemes, the average contribution rate was only 2.8 per cent for members and 6.6 per cent for employers. Part of the difference between defined benefit and defined contribution schemes’ contribution rates relates to differences in contracting out status (see Contributions by contracted out status section).
|Defined Benefit||Defined contribution|
|5,000 to 9,999||5.8||16.8||22.5||2.7||6.9||9.6|
|1,000 to 4,999||5.4||14.4||19.8||3.3||6.5||9.8|
|100 to 999||5.0||15.3||20.3||3.5||5.9||9.4|
|12 to 99||3.9||19.0||22.9||2.2||5.2||7.4|
Includes schemes where standard contributions were zero.
In the private sector, some defined benefit schemes (covering 0.3 million active members in 2011) calculated benefits on a career average basis, revaluing pension entitlements in line with inflation (price indexation, see Chapter 5). Figure 4.3 compares weighted average contribution rates for these schemes with those for members of all defined benefit schemes. In price indexed career average schemes, average employer contribution rates were lower than for defined benefit schemes as a whole (11.5 per cent compared with 14.2 per cent), but average member contribution rates were slightly higher (5.4 per cent compared with 4.9 per cent).
Table 4.4 shows breakdowns of numbers of active members in private sector schemes in 2011 by benefit structure, size of scheme and whether member contributions were made. A total of 1.9 million active members were in private sector defined benefit schemes with 12 or more members, compared with 0.9 million in defined contribution schemes. In 2011, 88 per cent of active members of private sector defined benefit schemes and 80 per cent of active members of defined contribution schemes belonged to schemes where members made contributions (percentages are calculated excluding non-response).
By contrast, almost all members were in schemes where employers made contributions in 2011. The survey asked private sector defined benefit schemes how regular employer contributions were made. In most defined benefit schemes (covering 83 per cent of active members), employers made regular contributions as a percentage of salary, but 12 per cent of active members were in schemes combining both a percentage of salary and fixed amounts, and 4 per cent were in schemes where employers made regular contributions as fixed amounts. Almost all contributing members of defined benefit schemes made their regular contributions as a percentage of salary. Fixed amount payments were unusual for regular member contributions.
A more detailed breakdown is given in Tables 4.5 to 4.8, which show the numbers of active members by the contribution rates of members and their sponsoring employers. Figures are shown separately for defined benefit and defined contribution schemes.
|5,000 to 9,999||0.2||0.0||0.2|
|1,000 to 4,999||0.2||0.0||0.3|
|100 to 999||0.1||0.0||0.1|
|12 to 99||0.0||0.0||0.0|
|5,000 to 9,999||0.1||0.0||0.1|
|1,000 to 4,999||0.1||0.0||0.1|
|100 to 999||0.1||0.0||0.1|
|12 to 99||0.0||0.0||0.0|
For private sector defined benefit schemes the most common band for member (employee) contributions in 2011 was ‘6 per cent to under 7 per cent’, accounting for a third of active members making contributions (Table 4.5).
|Non contributory or fixed amount only||Under 2%||2% to under 3%||3% to under 4%||4% to under 5%||5% to under 6%||6% to under 7%||7% and over||Total contributing||Non response||Total|
|Non contributory or fixed amount only||Under 4%||4% to under 8%||8% to under 10%||10% to under 12%||12% to under 15%||15% to under 20%||20% and over||Total contributing||Non response||Total|
Table 4.6 shows the pattern for employer contributions to private sector defined benefit schemes. In 2011, the most popular band was the ’15 to 20 per cent’ band, which accounted for 30 per cent of active members out of the total receiving employer contributions.
For defined contribution schemes in 2011, the most common band for member (employee) contributions was the ‘5 per cent to under 6 per cent’ band, covering nearly a quarter (23 per cent) of contributing active members (Table 4.7).
In 2011, 63 per cent of contributing active members of defined contribution schemes were contributing less than 5 per cent of salary. By contrast, only 13 per cent of contributing active members of private sector defined benefit schemes had contribution rates of less than 5 per cent in 2011 (Table 4.5).
|Non contributory||Under 2%||2% to under 3%||3% to under 4%||4% to under 5%||5% to under 6%||6% to under 7%||7% and over||Total contributing||Non response||Total|
Table 4.8 shows employer contribution rates to private sector defined contribution schemes. In 2011, 42 per cent of active members of private sector defined contribution schemes had employer contribution rates of ‘4 per cent to under 8 per cent’, and 54 per cent had employer contribution rates of under 8 per cent – out of the total receiving employer contributions. By contrast, only 3 per cent of active members of private sector defined benefit schemes who received employer contributions had employer contribution rates of under 8 per cent in 2011 (Table 4.6).
|Non contributory||Under 4%||4% to under 8%||8% to under 10%||10% to under 12%||12% to under 15%||15% and over||Total contributing||Non response||Total|
It is possible to divide active members into two groups: those who are in schemes that are ‘contracted out’ of the State Second Pension (S2P), and those who are in schemes that are not. Most public sector schemes are contracted out, but this is not the case for the private sector. Schemes can contract out in one of three ways: a contracted out salary related scheme (COSRS), a contracted out money purchase scheme (COMPS) or a contracted out mixed benefit scheme (COMBS) (see Contracting out in Chapter 2).
Tables 4.9 and 4.10 present the rates contributed in defined benefit and defined contribution schemes according to contracted out status. Most active members of private sector defined benefit schemes who contributed in 2011 (91 per cent) were in contracted out schemes, while 85 per cent of active members of private sector defined contribution schemes who contributed in 2011 were in schemes that were not contracted out.
Table 4.9 presents the data for member contribution rates. In private sector defined benefit schemes which were contracted out, 85 per cent of members were contributing in 2011 (excluding those making fixed amount contributions only), with nearly two-thirds (63 per cent) of contributing members making contributions of 6 per cent and over. In private sector defined benefit schemes which were not contracted out, 54 per cent of members were contributing in 2011. There was some difference in the proportion of those contributing in private sector defined contribution schemes that were contracted out (62 per cent) and not contracted out (70 per cent) in 2011. Only 14 per cent of contributing members in defined contribution schemes that were not contracted out (the majority) were making contributions of 6 per cent and over.
|Defined benefit||Defined contribution||All schemes|
|CO||Not CO||Total||CO||Not CO||Total||CO||Not CO||Total|
|2% to under 3%||0.0||0.0||0.0||0.0||0.1||0.1||0.0||0.1||0.1|
|3% to under 4%||0.0||0.1||0.1||0.0||0.1||0.1||0.0||0.2||0.2|
|4% to under 5%||0.1||0.0||0.1||0.0||0.1||0.1||0.1||0.1||0.2|
|5% to under 6%||0.4||0.0||0.4||0.0||0.1||0.1||0.4||0.1||0.6|
|6% and over||0.9||0.0||0.9||0.0||0.1||0.1||0.9||0.1||1.0|
|Non contributory or fixed amount only||0.2||0.1||0.3||0.0||0.0||0.0||0.2||0.1||0.3|
Table 4.10 presents the data for employer contribution rates by contracting out status. Almost all members were receiving employer contributions in 2011, but for defined contribution schemes, there were different patterns of employer contributions for contracted out and not contracted out schemes. In not contracted out defined contribution schemes, 58 per cent of active members received employer contributions of less than 8 per cent in 2011; this compares with 38 per cent of active members of contracted out defined contribution schemes.
As most private sector defined benefit schemes are contracted out, there is little difference between the pattern for contracted out schemes and the pattern for all defined benefit schemes.
|Defined benefit||Defined contribution||All schemes|
|CO||Not CO||Total||CO||Not CO||Total||CO||Not CO||Total|
|4% to under 8%||0.0||0.0||0.0||0.0||0.3||0.3||0.1||0.3||0.4|
|8% to under 10%||0.0||0.1||0.1||0.0||0.1||0.2||0.1||0.2||0.3|
|10% to under 12%||0.3||0.0||0.3||0.0||0.1||0.1||0.3||0.1||0.4|
|12% to under 15%||0.1||0.1||0.2||0.0||0.0||0.1||0.2||0.1||0.3|
|15% to under 20%||0.5||0.0||0.5||0.0||0.0||0.0||0.5||0.0||0.5|
|20% and over||0.4||0.0||0.5||0.0||0.0||0.0||0.4||0.0||0.5|
|Total contributing||1.4||0.2||1.6||0.1||0.7||0.8||1.5||0.9||2. 4|
|Non contributory or fixed amount only||0.2||0.0||0.2||0.0||0.1||0.0||0.2||0.1||0.3|
In 2011, 0.4 million active members of defined contribution schemes (45 per cent of active members of such schemes) belonged to schemes which had the same contribution rates for all members (Table 4.11). However, some defined contribution schemes have different contribution rate structures. The ways in which contribution rates can vary among members were considered as follows:
a) By age
b) By length of service
c) At the choice of the member
d) Depending on the grade or seniority of the employee
Schemes were also asked whether normal contribution rates were calculated separately for each individual member, so as to target a particular level of benefit at retirement.
|Made at the same rate for every member||0.3||0.3||0.3||0.3||0.4|
|Depending on the member’s age||0.2||0.3||0.2||0.2||0.2|
|Depending on the member's length of service||0.1||0.1||0.1||0.1||0.1|
|At the choice of member||0.3||0.5||0.5||0.4||0.3|
|Depending on grade or senority||0.1||0.1||0.1||0.2||0.1|
|Calculated individually for each member||0.0||0.0||0.0||0.0||0.0|
It is not possible to report a figure (or proportion) for active members of defined contribution schemes with variable contribution rate structures, as some schemes have more than one way in which contribution rates can vary; therefore, members may appear in more than one category. However, Table 4.11 shows that the most common ways in which contributions varied in 2011 were by choice of the member (0.3 million or 38 per cent of active members of defined contribution schemes, excluding non-response), by member’s age (0.2 million or 21 per cent of active members) or by grade or seniority (0.1 million or 16 per cent of active members).
Some schemes offer a completely different approach to making contributions, known as ‘salary sacrifice’. Under such an arrangement, contributions to schemes which would have been made by the employee are made by the employer, with the employee accepting a lower rate of pay. Such arrangements can serve to reduce National Insurance Contributions (NICs) for both employees and the employer. Information regarding salary sacrifice arrangements is requested from defined contribution schemes.
|Yes, all employer NICs savings||0.0|
|Yes, some but not all of employer NICs savings||0.1|
|Yes, no employer NICs savings||0.5|
NICs = National Insurance Contributions.
In 2011, 0.6 million active members of private sector defined contribution schemes with 12 members or more were in schemes which offered this type of arrangement; another 0.3 million active members were in schemes that did not. Thus over two-thirds (68 per cent) of active members of defined contribution schemes belonged to schemes that offered salary sacrifice arrangements. It should be noted that take-up of salary sacrifice arrangements is optional. The results do not indicate how many active members opted for salary sacrifice.
Table 4.12 shows the approaches to which National Insurance Contribution savings are paid into the employee's pension in 2011: 0.5 million active members of defined contribution schemes were in schemes which would not put the NIC savings into the employee’s pension. 0.1 million active members were in schemes which would have paid some of the NICs savings into the employee’s pension.
Member contribution rates in the main public sector schemes are shown in Table 4.13. This information does not come from the survey and does not have National Statistics status.
New schemes were introduced in 2005 for the Armed Forces , 2006 for the police and firefighters, 2007 for the teachers and civil servants, 2008 for the NHS and local authority employees (in England and Wales), and 2009 for local authority employees in Scotland (see Chapter 1 and Chapter 3 for details).
In its 2010 Spending Review, the Government proposed increases in public sector pension schemes’ member contribution rates from April 2012. Changes were implemented, over three years from April 2012, for some of the public sector schemes, generally on a tiered basis dependent upon level of earnings.
We do not report on public sector employer contributions in this report. The contributions made by employers to public sector schemes vary according to the arrangements made for financing each scheme.
The Local Government Pension Scheme (LGPS) for local authority employees is the only major public sector scheme that is funded (see Chapter 1), and employer contributions are calculated for each local authority fund separately by scheme actuaries, broadly in the same way as for private sector schemes.
Apart from the LGPS, most of the UK's public sector pension schemes are unfunded (see Chapter 1). They use a model called SCAPE (Superannuation Contributions Adjusted for Past Experience) for the calculation of a notional employer contribution rate. Under SCAPE, the amount of contributions by members and employers is required to be adequate, over time, to provide sufficient notional funds to cover the scheme’s liabilities assuming a stable discount rate. In March 2011, this discount rate was reduced from 3.5 per cent (real, in excess of inflation as measured by the Retail Prices Index, RPI), a rate which had been fixed since the late 1990s, to 3 per cent (real, in excess of inflation as measured by the Consumer Prices Index, CPI).
|Armed Forces||Non contributory. Value of pension is taken into account in the assessment of pay levels.|
|Civil Service||Members of Classic contributed 1.5 per cent. Members of Classic Plus, Premium and Nuvos contributed 3.5 per cent.|
|Local Government||Tiered, from low to high levels of pensionable pay. In England and Wales, the bands were from 5.5% to 7.5%; for Scotland, the bands were from 5.5% to 12%. Manual workers in England and Wales used to contribute at a 5% protected rate; this was phased out gradually between April 2008 and April 2011.|
|NHS||Tiered, from low to high levels of pensionable pay; the bands were from 5.0% to 8.5%. Until the end of 2008/09, manual workers continued to contribute at 5%.|
|Police||Members of the old scheme paid 11 per cent. This scheme was closed in April 2006. Members of the new scheme paid 9.5 per cent.|
|Firefighters||Members of the old scheme paid 11 per cent. This scheme was closed in April 2006. Members of the new scheme paid 8.5 per cent.|
|Teachers||All members paid 6.4 per cent.|
Source: Research by ONS analysts.
Since 1988, all schemes have had to offer a facility for active members to make additional voluntary contributions (AVCs), allowing them to secure benefits over and above those normally provided by the scheme. In 2011, 94 per cent of the active members of defined benefit schemes and 91 per cent of the active members of defined contribution schemes were in schemes offering AVCs.
The approach to AVCs can take a number of different forms, depending on the scheme rules. Money purchase (defined contribution) benefits, from investing the contribution on behalf of the member, are provided by all types of scheme. As a general rule, the only additional benefits purchasable in defined contribution schemes are money purchase benefits. Some defined benefit schemes also allow members to purchase added years (additional years of pensionable service) and there may be other benefits available in some schemes, such as a fixed extra pension at retirement.
Table 4.14 shows that in private sector defined benefit schemes, the type of benefit most commonly offered in 2011 was money purchase benefits (available to 1.5 million active members), while some schemes offered added years (0.6 million active members). In 2011, 0.5 million active members of private sector defined benefit schemes were offered both money purchase benefits and added years of service.
|Both of the above||0.5|
Defined benefit schemes were asked how they defined the earnings on which contributions were paid. In 2011, they were asked two questions: first, which bands of earnings they included when calculating the contributions members needed to pay (Table 4.15); and second, what type of earnings were included, for example, basic salary, overtime, bonus payments (Table 4.16).
For 1.8 million or 94 per cent of active members of such schemes, earnings between the lower earnings limit and the earnings cap qualified for pension contributions to be paid in 2011 (Table 4.15).
For 80 per cent of active members (1.5 million), earnings below the lower earnings limit qualified for pension contributions.
|Earnings below the lower earnings limit||1.5||0.4|
|Earnings between the lower and upper earnings limit||1.8||0.1|
|Earnings above the upper earnings limit to the earnings cap||1.7||0.2|
|Earnings above the earnings cap for pre-1989 entrants||1.6||0.3|
|Earnings above the earnings cap for post-1989 entrants||0.8||1.1|
|Definition of pensionable earnings is discretionary||0.3||1.6|
|Shift premium payments||0.9||1.0|
In 2011, most active members of private sector defined benefit schemes were in schemes which used basic salary as the basis for paying contributions (Table 4.16); 49 per cent were in schemes where shift premium payments were included in the calculations for contribution payments, 29 per cent were in schemes where overtime payments were included and 24 per cent where bonus/incentive payments were included.
In addition to questions on the contributions made, defined contribution schemes were asked whether members had any choice about how contributions were invested and, if so, what choices were available.
In 2011, 95 per cent of active members of defined contribution schemes were offered an investment choice. In those schemes that offered a choice of investment, the same range of choices was normally offered to all members of the scheme below retirement age, including ‘deferred members’. Schemes were asked to indicate whether 10 types of fund identified as commonly offered were available to members of that scheme. Figure 4.17 shows the percentage of members for whom each type of fund was available in 2009 to 2011, of those who were offered a choice. Over 80 per cent of active members had access to lifestyle funds, UK equity funds, UK gilt funds and cash funds, and there has been little change over the years.
However, there has been an increase in the proportion of those with UK property funds (to 57 per cent in 2011). Meanwhile, the availability of with-profits funds declined in 2010 and then increased slightly to 11 per cent of active membership in 2011.
Almost all active members of defined contribution schemes who had a choice of investment were able to split their investment between more than one fund in 2011, with 33 per cent of active members able to choose 5 to 9 funds and 45 per cent of active members able to choose 10 or more funds (Figure 4.18). It should be noted that the results do not indicate how many active members exercised their right to choose in this way.
The survey also found that most members of defined contribution schemes below retirement age were allowed to switch funds without charge. In 2011, 0.8 million active members belonged to such schemes. Of this total, 68 per cent were allowed unlimited switching, while 16 per cent could switch once a year and 4 per cent twice a year (Figure 4.19). Again, the results do not indicate how many active members exercised their right to switch funds in this way.
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