This chapter looks at contributions to private (non-state) pensions. These comprise occupational schemes for private sector and public sector employees; and personal pensions, including group personal pensions and stakeholder pensions (see Pension Trends Chapter 6). The chapter starts by considering the level of contributions to private sector occupational pension schemes made by scheme members and their employers. This information is presented for the different types of pension scheme, defined benefit (DB) and defined contribution (DC), and by contracting out status (see Pension Trends Glossary). It then looks in more detail at contributions to DC pensions, those comparable in terms of contracting out status with DC pensions likely to form the bulk of provision under the new reforms.
In 2010, according to the Occupational Pension Schemes Survey, the average employee in private sector defined benefit (DB) occupational pension schemes contributed 5.1 per cent of salary to their pension, compared with 2.7 per cent for employees in defined contribution (DC) occupational pension schemes. In general, the average contribution rate for members in DB schemes has shown a small increase over the last ten years. For DC schemes, there has been little change in member contribution rates.
In 2010, the average employer contribution rate for private sector DB occupational pension schemes was 15.8 per cent of salary, compared with 6.2 per cent for DC occupational pension schemes. Employer contribution rates for both DB and DC schemes have risen gradually over time.
Starting in October 2012, a new system will be introduced where employers will have a duty to automatically enrol all eligible employees into a qualifying workplace pension and contribute on their behalf. From October 2018, the minimum level of contributions (from both employee and employer) will be 8 per cent. Implementation will be on a phased basis, dependent upon the size of the employer.
Employers in DC occupational pension schemes with 12 or more members, which are comparable in terms of contracting out status with qualifying DC pension schemes under the new system (not contracted out of the additional state pension) contributed 6.2 per cent of salary in 2010, more than twice what they will have to contribute as a statutory minimum once implementation is complete.
The 2010 Annual Survey of Hours and Earnings (ASHE) shows some differences in total contribution rates between male and female employees in DC occupational pension schemes that are not contracted out (Figure 8.5).
At present, employers do not have to contribute to group personal pensions (GPPs) or group stakeholder pensions. For smaller private sector employers (less than 100 employees), 6 per cent of employees with GPPs and 13 per cent of those with stakeholder pensions received no employer contribution in 2010 (Figure 8.9).
Total contributions to personal and stakeholder pensions fell from £20.9 billion in 2007/08 to £18.6 billion in 2010/11 (Figure 8.11), largely due to a fall in the number of people contributing during the recession.
HM Revenue and Customs (HMRC) estimates that in 2010/11 there were 8.5 million members contributing to personal and stakeholder pensions. The Occupational Pensions Savings Scheme survey (OPSS) estimates that there were 8.3 million active members of occupational pension schemes.
Total contributions to private (non-state) pensions were £99.7 billion (6.8 per cent of GDP) in 2010.
This chapter looks at contributions to private (non-state) pensions. These comprise occupational schemes for private sector and public sector employees; and personal pensions, including group personal pensions and stakeholder pensions (see Pension Trends Chapter 6). The chapter starts by considering the level of contributions to private sector occupational pension schemes made by scheme members and their employers.
This information is presented for the different types of pension scheme, defined benefit (DB) and defined contribution (DC), and by contracting out status (see Pension Trends Glossary). It then looks in more detail at contributions to DC pensions, those comparable in terms of contracting out status with DC pensions likely to form the bulk of provision under the new reforms.
The chapter goes on to give an overview of contributions to public sector occupational pension schemes and to present evidence on contributions to individual and group personal pensions and stakeholder pensions.
Finally, it analyses aggregate contributions for all private pension types. Pension scheme membership is covered in more detail in Pension Trends Chapter 7.
Contribution levels alone do not provide a measure of pension adequacy. In DC schemes, also known as money purchase schemes, the pension also depends on the investment returns received while the contributions are invested in a pension fund (less charges) and, if an annuity is purchased, on the annuity market. In DB schemes, the scheme rules, in particular the accrual rate, determine the amount of pension that will be received.
There is considerable variation in the level of contributions between schemes, and in the balance between employer and employee contributions. At one extreme, employers bear the whole cost of running the pension scheme; these schemes are called non-contributory as their members pay no contributions. At the other extreme, there are pensions where the employer makes no contribution and the full cost of pension saving is carried by the individual; generally these are personal pension arrangements.
Around three-quarters of the cost and most of the risk of private sector DB occupational pension schemes falls on the employer1, while with DC occupational pension schemes, the employee makes around one-third of total contributions and carries the risk that the value of the pension will not be sufficient.
The amount of the employer contribution to a private sector DB pension scheme can vary and is usually based on actuarial estimates of the fund required to meet payments of scheme benefits (see Pension Trends Chapter 9). In the 1990s, when the strong equity market led to significant growth in fund values, some employers took contribution holidays to reduce pension fund surpluses.
The stock market decline in the early 21st century meant that some pension schemes were in deficit and employers had to make additional or special contributions. Such contributions may be in the form of lump sum payments, in which case they are not included in the following analyses of contribution rates.
The proportions given here are based on the average contribution rates presented in 2. Private sector occupational pension schemes.
Changes in contribution rates over time can be examined by looking at the distribution of active members across contribution bands. It should be noted that some of the changes in the distribution of members across contribution bands reflect underlying changes, such as the shift in membership from DB to DC schemes (see Pension Trends Chapter 6). On average, contribution rates for DB schemes are higher than for DC schemes.
This section looks at employee contribution rates for private sector DB and DC schemes with 12 or more members. In 2010, according to results from the Occupational Pension Schemes Survey (OPSS), the average employee in a private sector DB schemes contributed 5.1 per cent of salary. For DC schemes, the average contribution rate was 2.7 per cent.
In 2010, the OPSS questionnaire was redeveloped to ensure that if there were different contribution rates for different groups of members, then these were recorded. The scheme was asked to give the different rates and the corresponding proportion of active members to whom that rate applied. Prior to 2010, only the contribution rate that applied to the majority of members was recorded. This means that caution should be exercised when comparing the figures for 2010 with earlier estimates. In general, the average contribution rate for members in DB schemes has shown a small increase over the last ten years. For DC schemes, there has been little change in member contribution rates.
Table 8.1 shows information on the proportion of employees within each contribution rate band, from the 2010 OPSS. The analysis excludes very small schemes (with fewer than 12 members) as data on contribution rates are less robust for such schemes and they account for only a small proportion of private sector occupational pension scheme membership – 0.1 million members in 2010. The analysis also excludes those that did not provide information on their contribution rates, fewer than 0.1 million members in 2010.
The total number of active members of private sector occupational pension schemes (excluding very small schemes and those without information on contribution rates) fell from 6.3 million in 1991 to 2.9 million in 2010. For 2010, the proportion of members in the lower contribution bands (under 5 per cent) was 22 per cent of the total – 4 percentage points lower than in 1991. However, over this period the main change was an increase in the proportion of members in the highest contribution band. In 1991, 30 per cent of active members were in the 5-6 per cent contribution band and 22 per cent in the ‘6 per cent and over’ band. In 2010, the figures were 18 per cent and 39 per cent respectively.
The long-term trend since 1991 has been a shift from the middle contribution band (5-6 per cent) into the higher contribution band (6 per cent and over). However, this trend was interrupted in the mid-1990s, when membership shifted into lower contribution bands. In 1995, 37 per cent of members were in the ‘under 5 per cent’ bands and only 14 per cent were in the ‘6 per cent and over’ band, while 30 per cent were in the 5-6 per cent band. This may have been because by 1995, as equity markets recovered from the downturn of the early 1990s, DB pension schemes had more funds than they were allowed under taxation rules and therefore reduced employee (as well as employer) contributions.
|Under 3%||3% to under 5%||5% to under 6%||6% and over||Non-contributory or other basis|
In 2010, the OPSS questionnaire was redeveloped to ensure that if there were different contribution rates for different groups of members, then these were recorded. The scheme was asked to give the different rates and the corresponding proportion of active members to whom that rate applied. Prior to 2010, only the contribution rate that applied to the majority of members was recorded. This means that caution should be exercised when comparing the figures for 2010 with earlier estimates.
On average, regular contribution rates (excluding fixed amount payments) are higher for DB schemes than for DC schemes. The 2010 OPSS found that the average total contribution rate (employee plus employer contributions) for private sector DB occupational pension schemes was 20.8 per cent, while for DC schemes it was 8.9 per cent (further information is available in the OPSS 2010 Annual Report).
Figure 8.2 shows the breakdown by bands for 2006 to 2010. For DB schemes the most common rate for employee contributions was ‘6 per cent and over’; this band represented 63 per cent of active members in 2010 compared with 55 per cent in 2006. Although contribution rates were lower for DC schemes, between 2006 and 2010 there was a shift towards higher employee contribution rates for members of DC schemes. In 2006, 51 per cent of active members had contribution rates in the lower-middle bands (2-3 and 3-4 per cent) while 18 per cent were in the 4-5 per cent band. In 2010, 45 per cent were in the lower-middle contribution bands and 22 per cent were contributing at 4-5 per cent.
In this section, we look at employers’ regular contribution rates (excluding special contributions) for occupational pension schemes with 12 or more members, using results from the OPSS. Special contributions can be substantial where employers are correcting deficits in DB schemes. It should also be noted that employer contributions may be affected by salary sacrifice arrangements, where member contributions are made by the employer with the member accepting a lower rate of pay. Where such arrangements exist, the member and employer both benefit from lower National Insurance payments.
Employer contribution rates for both DB and DC schemes have risen gradually over time. However, there is a marked difference between rates in DB and DC pension schemes. In 2010, the average employer contribution rate for private sector DB occupational pension schemes was 15.8 per cent of salary. This compares with an average contribution rate of 6.2 per cent for DC schemes. Other things being equal, higher contribution rates will result in higher levels of benefit, although a small part of the difference is attributable to the different characteristics of the schemes and their members:
DC schemes, and hence their active members, are less likely to be contracted out of the additional state pension (see Contracting out and Table 8.4). Employers contributing to schemes that are not contracted out pay higher National Insurance contributions that will deliver benefits in the form of additional state pension for their employees.
Most DC schemes are not as long established as DB schemes (see Pension Trends Chapter 6). It is too early to assess whether contribution rates will increase as their membership matures.
The distribution of active membership by level of employer contributions is shown in Figure 8.3. Most active members of private sector DB schemes enjoy high employer contribution rates; 72 per cent had employer contributions of 12 per cent of salary or more in 2010.
Between 2006 and 2008 there was an increase in the proportion with ’15 per cent and over’ employer contribution rates from 52 per cent to 63 per cent. However, by 2010 this proportion had fallen to 58 per cent. In contrast, nearly half of active members of DC schemes were in the 4-8 per cent employer contribution rate band in 2006 to 2010.
Most DB occupational pension schemes are contracted out of the additional state pension (the State Second Pension, S2P, formerly the State Earnings Related Pension Scheme, SERPS), but most DC occupational pension schemes are not contracted out. In 2010, 88 per cent of active contributing members of private sector DB schemes belonged to contracted out schemes, while only 23 per cent of active contributing members of DC schemes were in contracted out schemes. The Pensions Act 2007 abolished the option for DC pension schemes to contract out of S2P, and this came into effect in April 2012.
|Defined Benefit||Defined Contribution|
|Contracted out||Not contracted out||Contracted out||Not contracted out|
|Contributions as % of salary|
|8% to under 12%||0.3||0.1||0.1||0.2|
|12% to under 15%||0.2||0.1||0.0||0.0|
|15% and over||1.0||0.1||0.0||0.0|
|Non-contributory or other basis||0.1||0.0||..||0.0|
Excludes schemes with fewer than 12 members and non-respondents.
'Other basis' means contributions made other than as a percentage of salary. It includes members of defined benefit schemes with normal contributions paid as fixed amounts only; if contributions were made both as a percentage of earnings and as fixed amount payments, membership is included in the percentage contribution rows.
Source: Occupational Pension Schemes Survey, Office for National Statistics
In theory, the relatively low employer contribution rates of DC schemes might be explained by the dominance of schemes which are not contracted out, as members of such schemes benefit from contributions made by their employers to the additional state pension, as well as their contributions to the occupational pension.
If this were the case, contracted out DC schemes should have employer contribution rates similar to those of (contracted out) DB schemes, while DC schemes which are not contracted out would have lower employer contribution rates.
Table 8.4 shows that to some extent this is the case. However, the ‘not contracted out’ status of the majority of DC schemes does not fully explain their lower employer contribution rates. In not contracted out DC schemes, 62 per cent of active members received employer contributions of less than 8 per cent in 2010.
47 per cent of active members of contracted out DC schemes received employer contributions of less than 8 per cent in 2010, while 53 per cent received 8 per cent and over. This contrasted with contracted out DB schemes, where 91 per cent of active members received 8 per cent and over and 60 per cent received 15 per cent and over.
On average, OPSS estimates that the employer contribution rate for not contracted out DC schemes in 2010 was 6.0 per cent, compared with 7.3 per cent for contracted out DC schemes and 15.9 per cent for contracted out DB schemes.
Under the Pensions Act 2008, a system will be introduced from October 2012 under which employers will have a duty to automatically enrol all eligible employees into a qualifying pension scheme and to make contributions on their behalf. The system will be introduced gradually. In order to qualify (based on the latest version of the timetable):
Between October 2012 and September 2017 DC schemes will have to have contributions of at least 2 per cent on a band of earnings, of which at least 1 per cent must come from the employer.
Between October 2017 to September 2018 the minimum contribution will be 5 per cent, of which at least 2 per cent must come from the employer.
From October 2018 it will be 8 per cent, of which at least 3 per cent must come from the employer.
As many employers do not have pension schemes, or have schemes which do not cover all of their employees, the Pensions Act 2008 made provision for the creation of a new DC occupational pension scheme: the National Employment Savings Trust (NEST), formerly known as ‘personal accounts’.
NEST meets the qualifying scheme standards and is available for those without a scheme. It is not contracted out of S2P, in line with the legislation abolishing contracting out for DC schemes which came into effect in April 2012.
It is of interest to look at current contribution rates for DC occupational pension schemes that are not contracted out of the additional state pension, as this group is broadly comparable with the new NEST scheme. However, it should be borne in mind when making such comparisons that some of the characteristics of contributors in NEST (and in other ‘not contracted out’ DC schemes under the workplace pension reforms) may be different from those in current DC pension schemes that are not contracted out. Thus, all comparisons should be treated with caution.
In 2010, according to the OPSS, the average total contribution rate for regular contributions to DC occupational pension schemes with 12 or more members that were not contracted out of the additional state pension was 9.1 per cent, comprising 6.0 per cent employer contributions and 3.1 per cent employee contributions.
OPSS contribution rates are expressed as a percentage of gross salary excluding bonuses, while the minimum contribution rates for the NEST scheme and other qualifying DC pension schemes under the new system are expressed as a percentage of a band of earnings including bonuses. This makes direct comparison difficult. However, it is possible to calculate examples of contribution rates as a proportion of gross salary under the new system1, allowing broad comparison with the 2010 OPSS results.
Such comparisons suggest that employees in DC occupational pension schemes with 12 or more members, which were comparable in terms of contracting out status to NEST and other DC schemes under the new system, contributed at a similar rate in 2010 (on average) as they would in a scheme with minimum contributions under the new system, once it is fully implemented. On the other hand, employers contributed more than twice what they would have to contribute as a minimum under the new system (once fully implemented).
There has been much discussion about how the Pensions Act 2008 will impact on existing provision. The reforms are designed to expand coverage of pensions to more people of working age. The Department for Work and Pensions estimates that, as a result of the reforms, between 5 million and 8 million people will save in workplace pensions for the first time or will save more than before in workplace pensions; these estimates are not classed as National Statistics.
However, some commentators have expressed concern that employers may reduce the contributions that they pay into pension schemes, particularly for those who are already members of schemes. This is referred to as ‘levelling down’. If it did happen, that could be as the reforms are introduced, or in the years leading up to their introduction.
In the remainder of this section and in the section on employer-sponsored personal pensions, we use data on total contribution rates from the Annual Survey of Hours and Earnings (ASHE) to show the current distribution of contribution rates by factors associated with individual scheme members such as sex, age, occupation, amounts earned and type of pension.
In coming years, at and after the introduction of the Pensions Act 2008 reforms, it will be interesting to note any changes in these contribution patterns, firstly to see if there are increases in contribution rates for certain groups, such as those on low incomes, and secondly to detect any evidence of levelling down. However, it should be noted that trends are likely to be influenced not only by pension reform but also by changes in the economic environment.
ASHE is a good source of data on contribution patterns because it collects information at individual level (by contrast with OPSS, which collects information at scheme level). However, it should be noted that it is not possible to compare average contribution rates from ASHE with those from OPSS. This is because ASHE includes small numbers of individuals making large lump-sum contributions, while the OPSS figures are based on regular contributions made as a percentage of salary only, excluding fixed amount payments and employer special contributions.
The 2011 ASHE shows modest differences in total contribution rates between male and female employees in DC occupational pension schemes not contracted out of the additional state pension (Figure 8.5). In 2011, the most common contribution rate for men and women was 8-12 per cent of earnings.
A higher proportion of women contributed at the lower contribution rates (under 8 per cent), with 29 per cent of women compared with 24 per cent of men contributing at this level. However, there was also a higher proportion of women than of men contributing at the highest contribution rates (20 per cent and over): 12 per cent of women compared with 11 per cent of men. The reasons for these differences in contribution rates are complex; contributing factors include different employment patterns, the distribution of earnings and the age of the employee.
Figure 8.5 Distribution of employee members of private sector defined contribution occupational pension schemes not contracted out of the additional state pension: by sex and total contribution rates, 2011 (United Kingdom)
As employees approach retirement they may wish to increase their pension contributions to try and improve their retirement benefits, if this option is offered as part of the scheme rules2. If members increase contributions as they approach retirement we would expect to see a relatively high proportion of older members in the higher contribution bands.
Figure 8.6 shows some evidence of this for DC schemes not contracted out of the additional state pension: the older age groups represent a greater proportion than the younger ones in most of the high contribution bands (16-20 per cent, 20-24 per cent, and 24 per cent and over); and the younger age groups represent a greater proportion than the older ones in the lower contribution bands (in particular the 4-8 per cent band).
This may be because older employees who are nearing retirement are more likely than younger employees to make large lump-sum (or regular) contributions. However, the relationship does not appear to be a strong one. In fact, the evidence in Figure 8.6 suggests that most employees in schemes that are not contracted out of the additional state pension contribute at similar rates irrespective of age.
Some caution should be exercised in interpreting these results, however, as the contribution rates reported for different age bands might reflect a ‘cohort effect’ rather than (or as well as) contribution patterns over individual lifetimes. In other words, they may show that many older workers benefited from higher total contribution rates over their working lives because they joined their pension schemes earlier, when regular contribution rates might have been higher. We cannot establish whether such an effect exists, as the data on contribution rates is not available before 2005.
The impact of people’s occupations on contribution rates is shown in Table 8.7, which shows the distribution of members of DC occupational pension schemes that are not contracted out of the additional state pension, classified by Standard Occupational Classification3 and their total contribution rates.
Figure 8.6 Distribution of employee members of private sector defined contribution occupational pension schemes not contracted out of the additional state pension: by age and total contribution rates, 2011 (United Kingdom)
In 2011, employees in sales and customer service had the lowest contribution rates: 48 per cent of scheme members in this occupational category had total contributions of less than 8 per cent of earnings, compared with 26 per cent for all occupations (Table 8.7). Managers and senior officials had the most generous total contribution rates: 31 per cent had total contributions of 16 per cent or more in 2011, and only 17 per cent had total contributions of less than 8 per cent.
|Greater than zero and under 4%||4% to under 8%||8% to under 12%||12% to under 16%||16% to under 20%||20% to under 24%||24% and over|
|Managers and senior officials||2||15||29||23||12||7||12|
|Associate professional and technical||3||19||31||22||11||6||8|
|Administrative and secretarial||5||20||33||17||8||8||9|
|Sales and customer service||8||40||25||13||10||x||x|
|Process, plant and machine operatives||9||30||31||20||4||x||x|
|Greater than 0 and under 4%||4 to under 8%||8 to under 12%||12 to under 16%||16 to under 20%||20 to under 24%||24% and over|
|£200 to under £300||8||32||26||14||7||4||8|
|£300 to under £400||8||27||32||18||7||4||5|
|£400 to under £500||5||26||37||17||6||5||5|
|£500 to under £600||4||19||36||21||11||4||4|
The impact of different earnings levels is shown in Table 8.8. As in previous years4, in 2011 employees with higher earnings tended to have higher total pension contribution rates. More than half of employees earning over £600 per week had total contribution rates of 12 per cent of earnings or more and only 19 per cent had total contribution rates of less than 8 per cent. By contrast, 40 per cent of employees earning £200-300 per week and 48 per cent of those earning under £200 per week had rates of less than 8 per cent.
For instance, median gross earnings including bonuses for a full-time male employee in 2009/10 were £28,020 according to the Annual Survey of Hours and Earnings (ASHE). In this case, the employee contribution rate under the new system as a percentage of gross salary would have been 3.1 per cent, while the employer contribution rate would have been 2.3 per cent. Median gross earnings including bonuses for a full-time female employee in 2009/10 were £22,492 according to ASHE. In this case, the employee contribution rate under the new system as a percentage of gross salary would have been 2.9 per cent, while the employer contribution rate would have been 2.2 per cent.
These calculations assume that the lower limit of the band of earnings under the new system would have been £6,475 in 2009/10 (equivalent to HMRC’s personal allowance for people under 65). The calculations also assume that employees and employers contribute at the statutory minimum rates; they could in fact contribute more. Comparisons with OPSS should be treated with caution, as OPSS reports on regular contributions as a percentage of gross salary excluding bonuses. Please note that the auto-enrolment trigger and qualifying earnings bands are likely to change. In 2012, the trigger will be £8,105.
In 2010, OPSS asked the larger defined contribution schemes (those with 12 or more members) the question “Are the normal contributions to the scheme made at variable rates that depend on the member’s age?” One-fifth of active members were in schemes that said yes.
The analysis uses Standard Occupational Classification 2010.
2005 to 2010 data is available by clicking on ‘Download table’ underneath Table 8.8.
Nearly all public sector occupational pension schemes are DB schemes. Membership is concentrated in the seven big public sector employers: the civil service, the armed forces, the National Health Service (NHS), teachers, the Local Government Pension Scheme for local authority employees (LGPS), police and firefighters. Apart from the LGPS, which is funded, all of these schemes are run on an unfunded or ‘pay as you go’ basis (see Pension Trends Glossary).
Recently, many public sector pension schemes have made changes to their employee contribution rates. These have been made as a result of recommendations outlined in the 2011 report of the Independent Public Service Pensions Commission chaired by Lord Hutton of Furness1.
Employer contributions to unfunded public sector pension schemes are largely an internal accounting transaction within government. For most of these schemes the level of contributions is estimated using a model known as SCAPE (Superannuation Contribution Adjusted for Past Experience). The model estimates the level of contributions which will be sufficient, over time, to cover the scheme’s liabilities.
1. The final report of Lord Hutton’s review of public service pensions was published in March 2011. The 2011 version of Pension Trends Chapter 8 details some of the earlier changes to contribution rates in public sector schemes. In general, these changes have led to increased contribution rates, although many schemes have introduced, or were already using, tiered structures where the contribution rate is determined by the employee’s earnings band.
Personal pensions (which include stakeholder pensions) are those where individuals enter into a contract with a pension provider, usually an insurance company (see Pension Trends Chapter 6). They may be taken out on an individual basis or arranged on a ‘group’ basis (usually facilitated by employers, who may make contributions for members). However, in group personal (or stakeholder) pensions, by contrast with occupational pensions, the employer is not the pension provider.
Some employers operate group personal pensions (GPPs) or group stakeholder pensions, either as well as an occupational pension scheme or as the main form of pension provision. Although the employees contributing to GPPs and group stakeholder pensions have individual contracts, the administration costs are likely to be lower than if they arranged an individual personal or stakeholder pension independently.
Figure 8.9 Distribution of employee members of private sector group personal pensions and stakeholder pensions where employer has less than 100 employees: by employer contribution rates (United Kingdom)
One of the reasons behind the introduction of stakeholder pensions in 2001 was to improve pension provision for people working for small employers. Small employers had often been unable to provide the more traditional form of occupational pension scheme for cost reasons, but stakeholder pensions are a relatively low-cost type of pension scheme. Therefore, it is of interest to examine employer contribution rates to GPPs and stakeholder pensions by size of employer.
Figures 8.9 and 8.10 show the proportion of GPP and stakeholder pension members by employer contribution rate for private sector employers with less than 100 employees and for employers with 100 or more employees respectively in 2011.
There was a clear difference between the two: in smaller employers, 35 per cent of those with GPPs and 28 per cent of those with stakeholder pensions had employer contribution rates of 6 per cent and over; whereas in larger employers, 47 per cent of those with GPPs and 46 per cent of those with stakeholder pensions had employer contribution rates of 6 per cent and over.
In group personal pension schemes, employer contributions are not mandatory at present (although this will change as a result of the workplace pension reforms to be implemented from October 2012). In smaller employers (Figure 8.9), 6 per cent of those with GPPs and 11 per cent of those with stakeholder pensions received no employer contribution in 2011; this compares with 2 per cent and 6 per cent respectively for larger employers (Figure 8.10).
Figure 8.10 Distribution of employee members of private sector group personal pensions and stakeholder pensions where employer has 100 employees or more: by employer contribution rates, 2011 (United Kingdom)
HM Revenue and Customs (HMRC) publish estimates of the number of people making contributions to personal and stakeholder pensions (both individual and group pensions) and average amounts contributed. All estimates of contributions are in nominal terms (values are not adjusted for inflation).
The total number of people making contributions to personal and stakeholder pensions in 2009/10 was estimated to be 6 million, of which 5.3 million were employees, 0.7 million were self-employed people and around 60,000 were ‘others’ (children, people in full-time education, carers, the unemployed and those in receipt of a pension).
There were fewer people contributing in 2009/10 than the previous years, when there were an estimated 7.6 million in 2007/08 and 6.4 million contributors in 2008/09 (see Pension Trends Chapter 6).
The average contribution per person was the same (£3,010) in 2009/10 as it was in 2008/09. Average contribution rates in 2001/02 were lower at £1,720 per person. For employees, the average contribution in 2009/10 was £3,010, up from £2,980 in 2008/09; but for the self-employed, the average contribution was £3,030 in 2009/10, down from £3,270 in 2008/09 (although up from £2,230 in 2001/02).
For the self-employed, individual personal and stakeholder pensions are the main alternatives for private pension saving. Apart from NEST (a recent option), they cannot join occupational pension schemes or group personal pensions. The self-employed also rely more on private pensions than employees as they do not have access to the additional state pension.
The total value of contributions paid into personal and stakeholder pensions, retirement annuity contracts (RACs) and freestanding additional voluntary contributions (FSAVCs) is shown in Figure 8.11. Contributions to personal and stakeholder pensions consist of minimum contributions and contributions by employers and individuals (employees, the self-employed and non-earners).
Personal and stakeholder pensions are flexible, allowing people to make contributions when they have money available and stop contributing in times of hardship. Total contributions to personal and stakeholder pensions, RACs and FSAVCs reached £20.9 billion in 2007/08, but then fell sharply during the recession – largely due to the fall in the number of people contributing to personal and stakeholder pensions. They were estimated at £18.6 billion in 2010/11.
Employer contributions have seen increases in most years, reaching £8.3 billion in 2010/11 compared with £0.5 billion in 1990/91. On the other hand, individuals’ contributions rose from £1.5 billion in 1990/91 to £10.2 billion in 2007/08, but then fell during the recession to £9.0 billion in 2008/09, £8.0 billion in 2009/10 and have since fallen to £7.6 billion in 2010/11.
FSAVCs can be made by members of occupational schemes. The decline since 1999/2000 is because many have chosen to save through stakeholder pensions rather than FSAVCs, partly because the administration costs are lower and partly because stakeholder pensions provide a more flexible method of saving. Since 6 April 2006, FSAVCs are no longer separately identified and are included in individuals’ contributions.
Figure 8.11 Contributions to personal and stakeholder pensions by contribution type (minimum, employer or individual) and to RACs and FSAVCs, 1990/91 to 2010/11 (United Kingdom)
Minimum contributions represent the rebate paid by HMRC to individuals who have used their personal or stakeholder pension to contract out of the additional state pension. Minimum contributions reached a peak of £3.0 billion in 1993/94 and then declined before rising in the first few years of the 21st century to a new peak of £3.6 billion in 2003/04; in 2010/11 they were £2.2 billion. The formula used to calculate minimum contributions changed in 1993/94 and again in 1998/99. Year on year comparisons may also be affected by changes in the time taken to process payments.
On 6 April 2006 (‘A-day’, see Pension Trends Chapter 1) a number of changes were made to the tax treatment of pension contributions. Each individual now has an annual and lifetime allowance for contributions that can receive tax relief. The higher levels of tax relief available in any one year after A-day may partly explain the 39 per cent increase in total contributions to personal and stakeholder pensions between 2005/06 and 2007/08, from £15.0 billion to £20.9 billion.
Figure 8.12 and Table 8.13 show the total amount of aggregate contributions to private (non-state) pension schemes broken down into contributions to funded and unfunded occupational pension schemes and personal pensions.
Most public sector pension schemes – for the Civil Service, the Armed Forces, the NHS, teachers, police and firefighters – are unfunded. Funded occupational pension schemes are found mainly in the private sector. The main exception is the Local Government Pension Scheme – the only major public sector scheme that is funded.
Information on aggregate pension contributions is presented in Figure 8.12 and Table 8.13. All estimates of contributions are in nominal terms (values are not adjusted for inflation). The methodology for estimating these figures has recently been revised. The changes are explained in a methodology article published in May 2012.
Information on the new basis is currently only available for 2010. For comparison purposes, the chapter presents estimates on the basis of the old and new methodologies. These estimates are not National Statistics.
Figure 8.12 Aggregate contributions to private pensions, 1997 to 2010 (United Kingdom, £billion)
Total contributions to private pensions were £33.4 billion (4.6 per cent of GDP) in 1995. They rose between 1995 and 2007 (Figure 8.12), growing particularly strongly between 2001 (£49 billion) and 2006 (£83.8 billion). They fell from £85.8 billion in 2007 to £82.1 billion in 2008, at the start of the recession, but recovered by 2010 to reach a new high of £94.6 billion (6.5 per cent of GDP) using the old basis, or £99.7 billion (6.8 per cent of GDP) using the new basis.
Table 8.13 presents the data used for Figure 8.12, focusing on the period 2004 to 2010. The discussion of the trends below relates to 2010 estimates on the old basis only. (The differences between the original and revised estimates for 2010 are explained in the methodology article).
Much of the impetus for the strong growth in the years from 2004 to 2010 came from employer contributions, particularly to funded occupational pension schemes, which rose from an estimated £28.7 billion in 2004 to £44 billion in 2010 (using the old basis). This was likely to have been associated with the requirement to finance deficits in private sector DB pension schemes.
|2004||2005||2006||2007||2008||2009||old basis 2010||new basis 2010|
|Funded occupational schemes||34.5||41.2||45.9||44.0||39.8||43.2||50.7||58.1|
|Unfunded occupational schemes||17.4||19.6||20.2||21.5||22.2||23.8||25.4||23.4|
|employees and other individuals||8.4||8.7||10.1||11.2||10.4||9.3||8.7||9.1|
|employees and other individuals||20.6||22.5||24.6||25.6||24.8||22.9||22.2||23.7|
At the start of the recession, as company finances came under pressure, estimates of employer contributions to funded occupational pension schemes dropped from £37.0 billion in 2007 to £32.7 billion in 2008. They recovered to reach £36.5 billion in 2009 and £44 billion in 2010 (on the old basis).
Continuing the upward trend since 2004, employer contributions to unfunded occupational and personal pensions increased during the recession reaching (respectively) £18.5 billion and £9.9 billion in 2010.
Contributions by employees and other individuals to personal pensions were also affected by the recession, falling from £11.2 billion in 2007 to £8.7 billion in 2010 (on the old basis). Employee contributions to unfunded occupational pensions also fell over this period from £7.5 billion in 2007 to £6.9 billion in 2010 (on the old basis).
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HM Revenue and Customs: Pension statistics
Miller, D. (2009) ‘Private pension contributions: updated estimates 1995-2007’, Office for National Statistics
Office for National Statistics, Annual Survey of Hours and Earnings Pension Tables
Office for National Statistics, Occupational Pension Schemes Annual Report
Office for National Statistics, Insurance Companies, Pension Funds and Trusts Investments (MQ5)
Office for National Statistics, United Kingdom National Accounts - The Blue Book: 2010 edition
Office for National Statistics, Pension Trends Glossary (198.9 Kb Pdf)
Office for National Statistics, Improved methods for calculating private pension contributions
Tily G, Penneck P and Forrest C (2004) ‘ Private pensions estimates and the National Accounts (138.6 Kb Pdf) ’, Economic Trends No.609, pp.36-46, Office for National Statistics
Tily G and Penneck P (2005) ‘ Private pension contributions: updated estimates 1996-2004 (101.8 Kb Pdf) ’, Economic Trends No.622, pp.29-34, Office for National Statistics
Wild, R. (2007) ‘ Private pension contributions: updated estimates 1996-2005 (73.1 Kb Pdf) ’, Office for National Statistics