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Contracting Out of Private Sector Defined Benefit (DB) Pension Schemes, 2012 This product is designated as National Statistics

Released: 04 March 2014 Download PDF

Abstract

The latest information on membership and contributions, by contracted out status, is presented for private sector defined benefit occupational schemes. The story focuses on 2012, but also provides active membership details for 2008 to 2012 inclusive.

Overview

Headline results from the 2012 Occupational Pension Schemes Survey (OPSS) were released in September 2013. This article looks at membership and contribution rates for private sector schemes which are ‘contracted out’ of the additional state pension. Public sector schemes are not included as they are almost all contracted out. Defined Contribution (DC) schemes are excluded as contracting out for DC schemes ended in April 2012.

If an occupational scheme is ‘contracted out’, it means that there is a statutory arrangement under which, if it meets certain conditions, it is permitted to not participate in the additional state pension (the State Second Pension or S2P), formerly known as the State Earnings Related Pension Scheme (SERPS). Members’ and employers’ National Insurance contributions are then reduced or partially rebated. Members of a contracted out pension scheme obtain rights in the pension scheme in place of additional earnings-related benefits under the state scheme.

Since 1978, it has been possible for a defined benefit scheme to allow its active (employee) members to contract out of the additional state pension. The ability to contract out of a defined contribution (money purchase) scheme, possible from 1988, ceased from 6 April 2012.  If the Pensions Bill 2013/14 is enacted, a flat rate state pension will be introduced and contracting out will also cease for defined benefit schemes from 2016.

Historic data, including information for defined contribution schemes, can be found in the 2011 OPSS Annual Report.

Active membership and contracting out

Table 1 shows the number of active members in private sector defined benefit schemes by contracted out status. It also shows the percentage of contracted out members.

The majority of active members of private sector defined benefit schemes (84%) were in contracted out schemes in 2012. Between 2008 and 2012, there has been a fall in both numbers of contracted out active members, from 2.4 million to 1.4 million, and the percentage of active members (91% to 84%) in contracted out schemes.

As in previous years, a higher percentage of those in the larger private sector defined benefit schemes are contracted out (Table 2). In fact, as membership in the largest schemes is a high proportion of total membership, the percentage contracted out of the larger private sector defined benefit schemes (84%) is the same as that for the whole population (Table 1).

Table 1: Active membership of private sector defined benefit occupational pension schemes: by year and contracted out status, 2012

UK, million      
Year                         Number of active members           Total Percentage of active members
 Contracted out Not contracted out contracted out
2008 2.4 0.2 2.6 91
2009 2.1 0.3 2.4 89
2010 1.8 0.3 2.1 88
2011 1.7 0.3 1.9 86
2012 1.4 0.3 1.7 84

Table notes:

  1. Source: Occupational Pension Schemes Survey.
  2. Percentages are based on unrounded numbers.
  3. Includes all schemes, including those with fewer than 12 members.

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Table 2: Active membership of private sector defined benefit occupational pension schemes: by size and contracted out status, 2012

UK, million             
Scheme Size               Number of active members                    Total Percentage of active members
 Contracted out Not contracted out contracted out
10,000+ 1.1 0.2 1.3 84
5,000 to 9,999 0.1 0.0 0.1 91
1,000 to 4,999 0.1 0.0 0.2 89
100 to 999 0.1 0.0 0.1 73
12 to 99 0.0 0.0 0.0 76
Total 1.4 0.3 1.7 84

Table notes:

  1. Source: Occupational Pension Schemes Survey.
  2. Percentages are based on unrounded numbers.
  3. Size refers to the total membership of the scheme (active, preserved and pensioner members).
  4. Excludes schemes with fewer than 12 members.
  5. Estimates for very small schemes are subject to considerable uncertainty, so figures for such schemes should be interpreted with caution.

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Contribution rates

Tables 3 and 4 shows the numbers and percentages of active members by contribution rate bands and contracted out status for those in private sector defined benefit schemes. Table 3 considers member (employee) contribution rates; Table 4, rates contributed by employers.

In general, as would be expected, those contracted out were more likely to be contributing higher amounts.

Table 3: Active members of private sector defined benefit occupational pension schemes: by member (employee) contribution rate and contracted out status, 2012

UK, million      
      Number of active members                   Total Percentage of active members
 Contracted out Not contracted out contracted out
Contributory        
    Less than 3% 0.0 0.0 0.0 64
    3% to under 4% 0.0 0.1 0.1 24
    4% to under 5% 0.0 0.0 0.1 67
    5% to under 6% 0.3 0.0 0.3 97
    6% to under 7% 0.3 0.0 0.3 96
    7% and over 0.4 0.0 0.5 95
Total contributing 1.1 0.1 1.2 89
Non contributory 0.2 0.1 0.3 61
Total 1.4 0.3 1.7 84

Table notes:

  1. Source: Occupational Pension Schemes Survey.
  2. Percentages are based on unrounded numbers.
  3. Excludes schemes with fewer than 12 members.
  4.  'Total contributing' excludes non-contributory and non-response.
  5.  'Total' includes members in schemes who did not respond to the contribution rate questions.

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Table 4: Active membership of private sector defined benefit occupational pension schemes: by employer contribution rate and contracted out status, 2012

 UK,  million      
   Number of active members              Total Percentage of active members 
 Contracted out Not contracted out contracted out
Contributory        
   Under 10% 0.0 0.0 0.1 55
   10% to under 12% 0.3 0.0 0.3 96
   12% to under 15% 0.2 0.2 0.3 52
   15% to under 20% 0.5 0.0 0.5 96
   20% and over 0.3 0.0 0.3 93
Total contributing 1.3 0.3 1.6 84
Non contributory 0.0 0.0 0.1 79
Total 1.4 0.3 1.7 84

Table notes:

  1. Source: Occupational Pension Schemes Survey.
  2. Percentages are based on unrounded numbers.
  3. Excludes schemes with fewer than 12 members.
  4. 'Total contributing' excludes non-contributory and non-response.
  5. The 'Total' row includes members in schemes who did not respond to the contribution rate questions.

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Number of schemes which are contracted out

Table 5 shows private sector defined benefit pension schemes with only one section and with more than 12 members. The larger schemes are more likely to be contracted out of the additional state pension. Table 5 excludes schemes with more than one section where some sections are defined benefit and some are defined contribution. These multi-section schemes are excluded because the defined benefit content is not separately identifiable.

The larger schemes are more likely to be contracted out of the additional state pension. The percentage of schemes with membership of 5,000+  that were contracted out (84%), was more than double that (40%) for schemes with 12 to 99 members  (Table 5).

Table 5: Private sector defined benefit occupational pension schemes with only one section: by size and contracted out status, 2012

 UK    
        Number of schemes Percentage of schemes
Scheme Size  Contracted out Not contracted out contracted out
5,000+ 160 30 84
1,000 to 4,999 320 140 70
100 to 999 1390 960 59
12 to 99 620 920 40
Total 2500 2050 55

Table notes:

  1. Source: Occupational Pension Schemes Survey.
  2. Percentages are based on unrounded numbers.
  3. Size refers to the total membership of the scheme (active, preserved and pensioner members).
  4. Excludes schemes with fewer than 12 members.
  5. Estimates for very small schemes are subject to considerable uncertainty, so figures for such schemes should be interpreted with caution.
  6. Figures in this table differ from those in the OPSS 2012 Statistical Bulletin because    
    that table includes winding-up and very small schemes.

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Background notes

  1. General information

    The Occupational Pension Schemes Survey (OPSS) is an annual survey of occupational pension schemes, and is run by the Office for National Statistics (ONS). The survey was first run in 1953, then in 1956 and 1963, and then every four to five years until 2004 when it became an annual survey. Until its transfer to ONS in 2006, OPSS was run by the Government Actuary’s Department (GAD).

    OPSS collects information from occupational pension schemes about scheme membership, benefits and contributions. It includes sections on very small schemes (schemes with 2 to 11 members) and those that are winding up. OPSS covers both private and public sector occupational pension schemes registered in the UK. Results from OPSS provide a detailed view of the nature of occupational pension provision in the UK.

    It is important to note that OPSS does not cover other workplace pensions such as group personal pensions or group stakeholder pensions, which are based on individuals entering into a contract with a pension provider; nor does it cover state pensions.

  2. Other releases for OPSS

    Headline results were released in September 2013 for the 2012 Occupational Pension Schemes Survey.

    An annual report was produced in previous years; the last was produced in 2011. Since then, ONS have produced what will be a series of short stories and continue to produce an annual OPSS Statistical Bulletin.

  3. Definitions

    Definitions are available in a Glossary on the ONS website.

  4. Methodology and quality information

    A Quality and Methodology Information (QMI) report is available. The aims of the QMI report are to provide users with a greater understanding of our statistics, their quality and the methods that are used to create them.

  5. Details of the policy governing the release of new data are available by visiting www.statisticsauthority.gov.uk/assessment/code-of-practice/index.html or from the Media Relations Office email: media.relations@ons.gsi.gov.uk

    These National Statistics are produced to high professional standards and released according to the arrangements approved by the UK Statistics Authority.

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