'Chapter 6: Benefits in defined contribution schemes' of the Occupational Pension Schemes Survey (OPSS) annual report 2011 gives information on the benefits provided to those in defined contribution ('money purchase') occupational pension schemes.
Chapter 5 considered the benefits available to members of defined benefit schemes. This chapter considers the benefits available to members of defined contribution schemes. The results presented in this chapter relate to schemes with 12 or more members only. All defined contribution occupational pension schemes are in the private sector.
There is no specified level of pension from a defined contribution scheme. The amount of pension depends on the amount of money paid into the scheme, how well the investment performs and, if an annuity is taken, the 'annuity rate' (the rate used to convert the member’s fund into a pension). Most defined contribution scheme members purchase annuities with their funds. Annuities are financial instruments provided by insurance companies that pay a guaranteed annual income to the holder for the rest of their life. From 6 April 2011, people with defined contribution pensions are no longer required to buy an annuity by age 75. At any time from age 55 they can either buy an annuity or opt for drawdown (for further information see Pension Trends Chapter 6).
As the level of pension from a defined contribution scheme is determined not by scheme rules but by investment performance and annuity market outcomes, this survey cannot collect information on defined contribution pensions. However, it does collect information on whether the scheme rules allow members to take lump sums on retirement and on the availability of income withdrawal. It also collects information on the provision of other benefits, such as ‘death in service’ and ‘ill-health retirement’, which are established by the rules of defined contribution schemes. The results are presented in this chapter.
In 2011, a lump sum was available from almost all defined contribution schemes at normal pension age. Lump sums are obtained from defined contribution schemes by giving up some pension. In most cases in 2011, the amount of the lump sum was only limited by HM Revenue and Customs rules, which allow people with defined contribution pensions to take up to 25 per cent of the fund as a tax free lump sum.
Instead of purchasing an annuity on retirement, some schemes allow members to leave the fund invested and withdraw income from it. This is known as income withdrawal or income drawdown. Figure 6.1 shows that 7 per cent of active members of defined contribution schemes were in schemes which allowed this type of arrangement in 2011. Readers should exercise caution when looking at changes in these figures over time, as they are based on relatively small sample sizes.
Table 6.2 shows the range of benefits provided by annuities or pensions in retirement, including benefits provided to the spouse or unmarried partner after a member’s death, pension increases over and above any statutory requirements, and a lump sum or pension guarantee on death after retirement. In 2011, most of the 0.9 million active members of defined contribution schemes with 12 or more members were in schemes which had these benefits, and they were generally provided at member’s choice.
|Always under scheme rules||At trustees discretion||At member's choice||Not applicable|
|Benefits to a spouse after a member’s death||0.1||0.0||0.8||0.0|
|Benefits to unmarried partner after a member’s death||0.0||0.1||0.7||0.0|
|A lump sum or pension guarantee on death after retirement||0.1||0.0||0.7||0.1|
Defined contribution schemes were asked whether they provided benefits on retirement before normal pension age because of ill health. If they did, they were asked how the level of benefits was calculated. Most defined contribution schemes offer benefits on ill-health retirement; 10 per cent of active members were not offered such benefits in 2011, a slight drop on the 12 per cent reported in 2010.
Table 6.3 shows active members offered ill-health retirement benefits grouped by the type of benefits offered to them. In 2011, 0.5 million active members who qualified to receive benefits were eligible for benefits based on the value of their money purchase accounts only, while 0.2 million qualified for benefits based on the member’s account plus an additional benefit. For 0.2 million active members, ill-health retirement benefits would come from a Permanent Health Insurance (PHI) scheme.
|Benefits based on an annuity purchased with the member's account||0.5|
|Benefits based on an annuity purchased with the member's account plus additional benefit||0.2|
|Benefits come from a Permanent Health Insurance (PHI) scheme||0.2|
|No benefit offered||0.1|
There is generally some provision for a pension on voluntary early retirement from a defined contribution scheme: 91 per cent of active members were in schemes where such a pension would be payable. For 94 per cent of active members of such schemes in 2011, the minimum age at which they could retire on their own initiative and receive an immediate pension was 55. This is a change from 2009, where the majority of active members were in schemes with a minimum age of 50. It reflects the increase in the legal minimum age for retirement – other than on ill-health grounds – from 50 to 55 from April 2010 under the terms of the Finance Act 2004 (see Chapter 5).
Defined contribution schemes did not offer enhancements to pensions as standard on early retirement. However, in 2011, 21 per cent of active members (excluding non-response) belonged to schemes which sometimes offered an enhancement. This was generally either at the initiative of the employee or on the employer’s initiative, for instance when making the employee redundant. A small minority of schemes sometimes offered an enhancement in other circumstances.
In 2011, almost all active members of defined contribution schemes belonged to schemes which offered some form of benefit in cases where members die before retirement (referred to as ‘death in service’). Death in service benefits can take the form of a lump sum, a pension paid to another person or a return of the member’s contributions or pension fund. The benefits can be given as of right under the scheme rules or at the trustees’ discretion (Figure 6.4).
When a lump sum is offered, the most common way of calculating it is as a multiple of earnings (Table 6.5). In 2011, a multiple of four times salary or greater was the most common method (70 per cent of active members, excluding non-response). This represents an important change from the 2004 OPSS results, when half of active members used another method, and only a quarter used the multiple of four times salary or greater.
|3x and under 4x||0.1|
|4x or greater||0.6|
|Multiple is used (no figure given)||..|
|Other method used||0.1|
There are various methods for calculating a dependant’s pension payable on death in service. These are presented in Table 6.6. Data was collected separately for three categories of dependant in 2011: the spouse, surviving children, and other nominated people. The results show little difference between these categories in terms of the number of active members benefiting from each method. The most common approaches in 2011 were based on a percentage of the member’s salary at the date of death and the pension that could be bought with the member’s money purchase account.
|Surviving spouse/civil partner||Surviving children||Other nominated person|
|Percentage of salary at date of death||0.3||0.2||0.2|
|Based only on pension that can be bought by the member's money purchase account|
|Based on members's pension and accrued service plus all or part potential service|
|Based on member's salary and on accrued service|
|Combination of methods||0.1||0.1||0.1|
As with defined benefit schemes, some defined contribution schemes pay benefits if members with preserved pension entitlements (known as ‘deferred members’) die before the scheme’s normal pension age. Table 6.7 shows what form these benefits took in 2011, and whether they were granted as of right under the scheme rules or at the discretion of the scheme trustees.
|As of right under the scheme rules||At trustees' discretion||Benefit not payable|
|Refund of money purchase fund||0.5||0.3||0.1|
|Other lump sum||0.0||0.1||0.8|
|Pension to surviving spouse and/or children||0.2||0.4||0.3|
|Pension to another nominated person||0.0||0.5||0.4|
Since 2004, there has been an overall reduction in the proportion of deferred members with benefits as of right under the scheme rules on death before normal pension age. In 2011, 55 per cent of the 1.1 million deferred members of private sector defined contribution occupational pension schemes were entitled to a refund of the money purchase fund as of right.
In 2011, the proportion entitled to a pension for the surviving spouse/children as of right was 18 per cent and for someone other than the surviving spouse or children as of right was 4 per cent.
Defined contribution schemes are, like defined benefit schemes, legally required to offer members with preserved pension entitlements the option of a transfer payment in exchange for these rights. Such a transfer payment must be paid into another pension arrangement. In defined contribution schemes, the transfer payment will almost always reflect the value of the member’s account minus exit charges. Therefore schemes were not asked about the value of outgoing payments. However, currently schemes are not legally required to provide preserved pensions to leavers with less than two years’ pensionable service. Therefore, schemes were asked for their policy towards those leaving in these circumstances.
Figure 6.8 shows the results for active members by whether the scheme offers a refund of contributions, a preserved pension or the cash equivalent transfer value (explained in Chapter 5). In 2009 to 2011, the main options available to those leaving with less than two years’ service were a refund of contributions and a Cash Equivalent Transfer Value (CETV).
When a member is divorced, a pension sharing order is sometimes made, which entitles the member’s former spouse to a share of the member’s benefits. The former spouse would then have their own rights in the scheme, and would be known as a ‘pension credit member’. Private sector defined contribution schemes were asked about their policy towards this group of members.
In 2011 (as in 2009 and 2010), 0.6 million active members were in schemes where pension credit members’ entitlements are always transferred out of the scheme, the most common approach. The other main approach was to offer pension credit members a choice. In 2011 (as in 2009 and 2010), there were 0.2 million active members belonging to schemes where pension credit members were offered a choice.
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