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Improved methods for calculating private pension contributions

Released: 15 May 2012 Download PDF

Abstract

This article describes a new approach to calculating the amounts of money contributed to private pensions in the UK, presenting the estimates for 2010.

Summary

This article describes a new approach to calculating the amounts of money contributed to private pensions in the UK. The methodology for estimating aggregate contributions was originally developed by the Pension Statistics Task Force in 2002; some improvements have been made to the methodology since then by ONS’s Pensions Analysis Unit. The article reconciles the results produced with the information shown in the UK National Accounts.

In 2010, total contributions to private (non-state) pensions in the UK totalled £99.7 billion; of this, contributions to occupational schemes totalled £81.6 billion (82 per cent of all contributions) and contributions to personal (group and individual) pensions were £18.1 billion (18 per cent of all contributions). Contributions from employers (£75.9 billion) accounted for around three-quarters (76 per cent) of all contributions.

Background

This article is the fifth in a series published since the official review of pension contribution statistics in 2002. The previous articles are listed in the ‘References’ section1. This article presents a new approach for calculating aggregate private (non-state) pension contributions and gives figures for 2010 on this new basis alongside updated estimates for 1995 to 2010 on the previous methodology.

The article is divided into four sections. The first section describes the pension scheme classification and data sources used for the estimates; the second describes recent changes made to methodology; the third presents the latest estimates of aggregate contributions based on the previous methodology and 2010 estimates based on the new methodology. The final section compares these estimates with those published in the UK National Accounts.

Earlier methodological discussions are not repeated here, but interested readers can find them in the previous articles in the series. These articles also provide a detailed description of the difficulties associated with estimating pension contributions in the National Accounts.

Notes for Background

  1. The first two articles (Tily G, Penneck P and Forrest C (2004) and Tily G and Penneck P (2005)) were published by members of the Pension Statistics Task Force and discussed the complexities of measuring pension flows and the associated problems of estimates derived from surveys. They presented preliminary estimates of total pension contributions for the years 1995 to 2002 and also described inconsistencies that had been identified in the compilation processes for pension estimates in the National Accounts. Private pension contributions: updated estimates 1996-2004 (Wild, 2005), described the progress that had been made in the surveys of pension funds and insurance companies and provided updated estimates of aggregate pension contributions based on methodological improvements. A further update (Miller, 2009) gave information for 1995 to 2007. Links to all articles are given in the References section.

Pension scheme classification and data sources

Funded occupational schemes

Funded occupational pension schemes are found mainly in the private sector. The main exception is the Local Government Pension Scheme (LGPS) for local authority employees1. However, there are also funded pension schemes for BBC and Transport for London employees and schemes with a Crown guarantee such as those for members of formerly nationalised industries (railways, coal and telecommunications) for which Government is responsible2.

The ONS survey of insurance companies, pension funds and trusts (MQ5), published as 'Investment by Insurance Companies, Pension Funds and Trusts' (ONS, 2012) is a key source for information on contributions to funded occupational pensions. Figures from the MQ5 pension funds inquiry are used to estimate the level of contributions to self- administered pension funds (see Box 1). However, as explained in previous articles (Wild, R. (2007), Miller, D. (2009)), there have been issues with estimating the contributions relating to insured occupational pensions using premiums data from the MQ5 survey of insurance companies.  As discussed in the Methodology changes section, these issues have now been resolved.

Information on contributions to the LGPS and other funded occupational pension schemes for which Government is responsible are covered by the MQ5 pension funds inquiry but individual schemes also produce accounts, some of which are publicly available.

Personal pensions

Personal pensions include group personal and individual personal pensions. All personal pensions are funded. Estimates of contributions to personal pensions are based on data from HM Revenue and Customs (HMRC, 2012), derived from returns made by pension providers or the individual as part of the administrative process for claiming tax relief on contributions. This source covers personal (including group personal) pensions, stakeholder pensions and Retirement Annuity Contracts (RACs), the precursor to personal pensions. HMRC data does not cover Self-Invested Personal Pensions (SIPPs). Following the 2004 Finance Act, Freestanding AVCs are no longer separately collected and are included in employee contributions to personal and stakeholder pensions and RACs. In 2011/12 HMRC reviewed the methodology behind all of their tables and have consequently made some revisions to their estimates of contributions.

Unfunded occupational pension schemes

The main occupational pension schemes in the public sector are unfunded. While employees make actual contributions to public sector unfunded schemes, employer contributions are an internal accounting transaction within government. Employer contributions are calculated on an actuarial basis (in some instances by the Government Actuary’s Department but in others by appointed private sector actuarial firms) to represent the amounts that would be required to meet the accruing liabilities if the schemes were funded.

The information on unfunded occupational pension schemes comes from amalgamated figures from the pension schemes’ accounts.

Contributions to unfunded private sector pension schemes are rare and there is no information available on them.

Notes for Pension scheme classification and data sources

  1. The funded local government pension scheme covers local authority employees; the police and firefighters belong to unfunded public sector schemes which are administered locally.
  2. See Levy, S (2012) under References. Article 3 of the series (A fuller picture of the UK’s funded and unfunded pension obligations) – see Boxes 1 and 3 of that article for further discussion of classification issues.

Box 1: Self-administered, insured and insurance-managed funds

Contributions to funded pension schemes are split into three categories:

If the assets are owned by the scheme trustees, contributions are made to a self-administered pension fund. These funds are categorised as 'self-administered' but a subset are 'insurance-managed', the latter being where the trustees have appointed an insurance company to manage the fund.

If the trustee holds, as a sole asset, an insurance policy or an annuity contract with an insurance company, the fund is categorised as 'insured'.

Personal pensions, including stakeholder pensions, are provided by insurance companies and are also classified as 'insured'.

Methodology changes

There have been some recent improvements to the methodology for estimating contributions to private (non-state) pension schemes which are presented in this article for 2010, labelled as 'new basis'. The changes relate to the estimation of contributions paid to

i) insured occupational pension funds and insurance-managed pension funds and
ii) funded occupational pension schemes for which Government is responsible.

i) Contributions to insured occupational and insurance-managed pension funds:
In the past, ONS has encountered difficulties in estimating the total value of contributions paid to insured occupational pension funds. Information on regular and single (one-off) premiums paid is collected as part of the ONS survey of insurance companies, pension funds and trusts (MQ5). Contributions made as single premiums to insurance companies are complicated to estimate because transfers of pension contributions between insurance companies are often recorded as new business within single premiums. Failure to take this into account would cause double counting. Previously (see Miller, D. (2009)), ONS has used data from the Association of British Insurers (ABI) to estimate regular premiums accepting that there would be some underestimate of contributions to insured funds (due to the exclusion of single premiums).

A review of the quality of the MQ5 insurance company data on transfers and premiums has been conducted and ONS is now confident that it is possible to use the MQ5 information to estimate both regular and single premiums, having made appropriate adjustments for transfers. The new contributions estimates therefore cover single as well as regular premiums information and use MQ5 as the data source.

Contributions to 'insurance-managed' funds (see Box 1: Self-administered, insured and insurance-managed funds) could be recorded both by the pension funds themselves and by the insurance company. This may again lead to double counting. In previous articles, an estimate of contributions to insurance-managed funds has been subtracted from the estimate of self- administered pension fund contributions. In the new methodology this estimate is subtracted instead from the estimate of contributions to insurance companies. This has been done using a list provided to ONS by the Financial Services Authority which identifies companies that principally do insurance‐managed pensions business.

In order to produce the new estimates of contributions paid to insured occupational pensions, it is necessary to first adjust the contributions by removing information for insurance-managed funds and then remove transfers (where the transfers estimate is net of transfers for any companies identified as insurance-managed). These figures are presented for 2010 in the following sections, labelled 'new basis'. The self- administered pension funds contributions now include contributions to insurance-managed pensions business.

ii) Contributions to funded occupational pension schemes for which Government is responsible:
In previous methodology, contributions to funded occupational pension schemes for which Government is responsible were not considered separately from estimates of contributions to all funded schemes. Estimates of contributions were taken from the MQ5 pension funds inquiry.  As part of the improvement work on the figures, ONS has looked more closely at the contributions estimates. For the private sector the pension funds inquiry continues to be used as the source. However, for the schemes for which Government is responsible, estimates for 2010 on the ‘new basis’ are based upon the individual scheme accounts. This has resulted in a slightly higher estimate of contributions to funded schemes than under the previous methodology.

Results

Table 1 shows the breakdown of contributions to funded occupational pension schemes between self-administered pension funds and insured funds. Self-administered pension funds can be broken down into employer and employee contributions1. The updated estimates of overall contributions to private pension schemes for 1995 to 2010 are shown in Figure 2 and Table 3.

Estimates for 2010 on the new basis are also shown in each figure alongside the estimates on the previous basis. As noted in the Methodology section, changes between these two columns can be explained by three key factors:

  • the inclusion of single premiums (adjusting for transfers) to insurance companies which has increased the level of contributions to insured pension funds

  • the use of data from accounts for funded occupational pension schemes for which Government is responsible – this has increased the estimate of contributions to self- administered pension funds

  • the exclusion of insurance-managed funds from insured pension funds rather than from self- administered pension funds (which has decreased the level of contributions to insured pension funds but increased the amount in self- administered pension funds)

In addition to the methodological changes, it should be noted that the source data for previous years may also have been revised2.

Table 1: Contributions to funded occupational pension schemes, 2004 - 2010

United Kingdom, £ billion

    2004 2005 2006 2007 2008 2009 2010   new basis 2010
                     
Funded occupational schemes 34.5 41.2 45.9 44.0 39.8 43.2 50.7   58.1
of which:  
                   
Self-administered pension funds 30.3 36.6 40.1 38.3 33.9 37.3 45.1   47.0
                     
Employer contributions 25.4 31.2 34.6 33.0 28.6 32.3 40.2   41.9
Employer contributions - normal 17.6 20.4 21.4 21.1 21.7 22.3 23.6  
Employer contributions - special 7.8 10.8 13.2 11.9 6.8 10.0 16.5  
                     
Employee contributions 4.9 5.4 5.5 5.2 5.3 4.9 5.0   5.1
                   
Insured pension funds 4.2 4.6 5.8 5.7 5.9 5.9 5.5   11.1

Table notes:

  1. Sources: 2004-2010: ONS Investment by insurance companies, pension funds and trusts (MQ5); Association of British Insurers

  2. Sources: new basis 2010: ONS Investment by insurance companies, pension funds and trusts (MQ5); public sector funded pension scheme accounts

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In 2010, on the new basis, contributions to funded occupational schemes totalled £58.1 billion; £47.0 billion (81 per cent) from contributions to self-administered pension funds, £11.1 billion (19 per cent) from contributions to insured pension funds.

Figure 2: Contributions to private pension schemes, 1995 - 2010

Line chart giving contributions estimates from 1995 to 2010 and 2010 on the new basis. Estimates for total, funded occupational, unfunded occupational and personal pension contributions.

Notes:

  1. Sources: 1995-2010: ONS Investment by insurance companies, pension funds and trusts (MQ5), UK National Accounts Table 6.1.4S, Association of British Insurers, HM Revenue & Customs
  2. Sources: new basis 2010: ONS Investment by insurance companies, pension funds and trusts (MQ5), public sector pension scheme accounts, HM Revenue & Customs

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Table 3: Contributions to private pensions by scheme classification and source of contribution, 1995-2010

United Kingdom, £ billion

    1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 new basis 2010
                                     
Funded occupational schemes 16.3 17.4 18.4 19.6 21.0 22.9 23.2 25.9 32.1 34.5 41.2 45.9 44.0 39.8 43.2 50.7 58.1
of which:
employers 11.7 12.6 13.0 13.9 14.9 16.1 16.5 19.2 25.4 28.7 34.4 38.7 37.0 32.7 36.5 44.0 49.7
employees 4.7 4.8 5.3 5.7 6.1 6.7 6.7 6.7 6.7 5.8 6.8 7.2 7.0 7.1 6.7 6.6 8.5
Unfunded occupational schemes 8.6 9.8 10.0 10.7 11.3 12.0 12.9 14.7 16.1 17.4 19.6 20.2 21.5 22.2 23.8 25.4 23.4
of which:
employers 6.2 7.3 7.5 8.0 8.3 8.9 9.5 10.5 10.8 11.0 12.5 12.9 14.0 14.9 17.0 18.5 17.3
employees 2.4 2.5 2.5 2.7 3.0 3.1 3.5 4.2 5.3 6.4 7.0 7.3 7.5 7.3 6.8 6.9 6.2
Personal pensions 8.5 9.3 10.4 11.0 11.7 12.5 12.9 13.9 14.3 14.4 14.9 17.7 20.3 20.1 19.0 18.6 18.1
of which:
employers 2.0 2.2 2.5 2.9 3.4 4.0 4.4 5.1 5.8 6.0 6.1 7.6 9.1 9.7 9.7 9.9 9.0
employees and other individuals 6.5 7.1 7.9 8.1 8.3 8.5 8.4 8.8 8.5 8.4 8.7 10.1 11.2 10.4 9.3 8.7 9.1
Total contributions 33.4 36.5 38.8 41.3 43.9 47.4 49.0 54.4 62.5 66.3 75.6 83.8 85.8 82.1 86.0 94.6 99.7
of which:
employers 19.8 22.1 23.0 24.9 26.5 29.1 30.4 34.7 42.0 45.7 53.1 59.2 60.2 57.3 63.1 72.5 75.9
employees and other individuals 13.6 14.4 15.7 16.4 17.5 18.3 18.6 19.7 20.5 20.6 22.5 24.6 25.6 24.8 22.9 22.2 23.7
                                     

Table notes:

  1. The methodology for calculating contributions to unfunded occupational pensions has not changed. Estimates in Table 3 for 1995-2010 are consistent with those published in Table 6.1.4S of the Blue Book 2010. Blue Book was published in November 2011, when some of the scheme accounts were either not available or held provisional estimates at that time. The new basis column includes the latest estimates from the scheme accounts.
  2. HM Revenue and Customs data is used for calculating contributions to personal pensions. The new basis column reflects the changes in methodology by HMRC.
  3. Figures may not add due to rounding.
  4. Sources: 1995-2010: ONS Investment by insurance companies, pension funds and trusts (MQ5); UK National Accounts Table 6.1.4S; Association of British Insurers; HM Revenue & Customs

  5. Sources: new basis 2010: ONS Investment by insurance companies, pension funds and trusts (MQ5); public sector pension scheme accounts; HM Revenue & Customs

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In 2010, total contributions to private (non-state) pensions in the UK totalled £99.7 billion; of this, contributions to occupational schemes totalled £81.6 billion (82 per cent of all contributions) and contributions to personal (group and individual) pensions were £18.1 billion (18 per cent of all contributions). Contributions from employers (£75.9 billion) accounted for around three-quarters (76 per cent) of all contributions.

Notes for Results

  1. Although a split between employee and employer contributions to insured funds (most of which relate to defined contribution pensions) is not available, such a split is needed in order to estimate the overall employee/ employer breakdown of contributions to funded occupational pension schemes in the National Accounts. This is estimated using data on the split between employee and employer contributions to defined contribution schemes from the relevant year of the Occupational Pension Schemes Annual Report (ONS, Oct 2011).
  2. Revisions may be made for example as a result of methodological changes or late survey returns. Investment by Insurance Companies, Pension Funds and Trusts (MQ5) (ONS, 2012) includes information on revisions as part of the background notes. HMRC information on methodological changes can be found on the announcements page of the HMRC website.

Reconciliation with National Accounts

The National Accounts treatment of contributions data is complex. It aggregates components according to the internationally agreed European System of Accounts (ESA). The key difference between this approach and the definitions employed in pensions more generally is that contributions in the National Accounts framework are defined as either 'social' or 'non-social'. Contributions that meet certain requirements, for example those that insure employees against sickness, unemployment and retirement fit into the social category. These include National Insurance payments, employers' liability insurance and contributions to occupational and group personal pension schemes, but exclude contributions to non-employer-sponsored (or ‘individual’) personal pensions. While social contributions to funded pension schemes are separately identifiable in the accounts, non-social contributions form part of larger aggregates in the ‘Financial Account’. In addition, 'property income' accruing to pension funds (interest, dividend and rental payments on assets), for all types of pension, is assumed to be owned by the household sector, and forms a very large part of part of the social aggregate.  Although suited to providing a description of the macro-economy, this framework is less helpful in describing changes in contributions by conventional pension classifications.

The Office for National Statistics (ONS) is currently undertaking a major project1 to implement changes generated by revised international guidance manuals within the UK National Accounts; specifically the European System of Accounts (ESA2010). The recent improvements made to contributions estimates have arisen partly as a result of this project. Other changes are discussed further in the three articles referenced in the References section (see Levy, S (Aug 2011), (Dec 2011) and (2012)).

Table 4: Social contributions to funded pension schemes, showing comparison of contributions to funded occupational pension schemes - Blue Book, article and new basis, 2004 - 2010

United Kingdom, £ billion

    2004 2005 2006 2007 2008 2009 2010
                 
Employers' contributions to funded occupational schemes
 - Blue Book basis 28.8 34.5 38.8 37.1 32.8 36.5 43.7
 - article basis 28.7 34.4 38.7 37.0 32.7 36.5 44.0
 - new basis (2010 only) .. .. .. .. .. .. 49.7
Employees' contributions to funded occupational schemes
 - Blue Book basis 5.7 6.8 7.2 6.9 7.1 6.7 6.8
 - article basis 5.8 6.8 7.2 7.0 7.1 6.7 6.6
 - new basis (2010 only) .. .. .. .. .. .. 8.5
                 

Table notes:

  1. '..' indicates not available. The National Accounts teams are looking at how the new series could be back-dated in keeping with the revisions policy.
  2. The methodologies for calculating contributions to unfunded occupational pensions and personal pensions have not changed and therefore the comparisons between the different methods are not shown.
  3. Sources: Blue Book basis: estimated breakdowns from UK National Accounts Table 6.1.4S in Blue Book 2010.

  4. Sources: article basis: ONS Investment by insurance companies, pension funds and trusts (MQ5); UK National Accounts Table 6.1.4S; Association of British Insurers; HM Revenue & Customs.

  5. Sources: new basis: ONS Investment by insurance companies, pension funds and trusts (MQ5); public sector pension scheme accounts; HM Revenue & Customs.

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Table 4 presents a comparison between the different estimates of contributions to funded occupational pension schemes. Contributions to unfunded occupational pension schemes and to personal pensions are not shown as the methodology has not changed. The 'Blue Book basis' lines are created by taking figures for social contributions to funded pension schemes from the Blue Book 2010 (Table 6.1.4S, lines D.6111 and D.6112) and removing estimates for contributions to personal pensions, employers’ liability insurance and property income accruing on pension funds. These figures are then compared with the 'article basis' and 'new basis' figures shown in Table 3 (for 2010 only). The National Accounts teams are looking at how the new series could be back-dated as part of the move to ESA2010 compliance.

In 2010, employer contributions to funded occupational pension schemes was £49.7 billion on the new basis, this compared an estimate of £43.7 billion from the Blue Book. Employee contributions on the new basis were £8.5 billion, compared with an estimate of £6.8 billion from the Blue Book.

As discussed in the Results section, the primary reason for the increased level of contributions on the ‘new’ basis compared to the other estimates is the inclusion of single premiums (adjusting for transfers) paid to insurance companies (affecting employer contributions). The use of data from accounts, for funded occupational schemes where Government is responsible, has also added to this increase (affecting both employer and employee contribution levels).

Any differences between the Blue Book 2010 figures and article basis estimates are due to updates to the source data or as a result of the National Accounts balancing process.

Notes for Reconciliation with National Accounts

  1. Further information on the wider ESA2010 programme is available from the ONS ESA2010 project pages.

Background notes

  1. 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

References

  1. HM Revenue and Customs (HMRC, 2012): Pension Statistics.
  2. Miller, D. (2009) ‘ Private pension contributions: updated estimates 1995-2007 (40.8 Kb Pdf) ’, Office for National Statistics
  3. Levy, S. (Aug 2011): ‘Pensions in the National Accounts – compiling a complete picture of UK pensions including unfunded pensions for public sector employees', Office for National Statistics
  4. Levy, S. (Dec 2011): ‘Pensions in the National Accounts – compiling estimates of state pension obligations for the National Accounts', Office for National Statistics
  5. Levy, S. (2012): ‘Pensions in the National Accounts – A fuller picture of the UK’s funded and unfunded pension obligations', Office for National Statistics
  6. Office for National Statistics (ONS, Apr 2011) Pension Trends Chapter 9: Pension scheme funding and investment.
  7. Office for National Statistics (ONS, Sept 2011) Pension Trends Chapter 8: Pension contributions.
  8. Office for National Statistics (ONS, Oct 2011) Occupational Pension Schemes Annual Report: 2010 edition.
  9. Office for National Statistics (ONS, Nov 2011) United Kingdom National Accounts - The Blue Book: 2011 edition.
  10. Office for National Statistics (ONS, 2012) Investment by Insurance Companies, Pension Funds and Trusts (MQ5).
  11. Tily G, Penneck P and Forrest C (2004) ‘ Private pension estimates and the National Accounts (138.6 Kb Pdf) ’, Office for National Statistics
  12. Tily G and Penneck P (2005) ‘Private pension contributions: updated estimates 1996-2004’, Office for National Statistics
  13. Wild, R. (2007) ‘ Private pension contributions: updated estimates 1996-2005 (73.1 Kb Pdf) ’, Office for National Statistics
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