Big employers exceeding AE obligations

Almost half of FTSE 100 companies enrol more staff into DC pensions than they are legally required to, with 46 per cent going beyond auto-enrolment rules, while more than nine out of 10 use a definition of pensionable pay that is typically better than “qualifying earnings”, research from Willis Towers Watson has found.

workersContribution rates have remained broadly stable since the introduction of AE, with FTSE 100 employers committing up to 10 per cent of pay, with a slight fall in contribution rates by FTSE 250 employers. 79 per cent of FTSE 350 schemes use the same contribution design for all employees, with 64 per cent having some element of matching employee contributions

The study of FTSE 350 companies’ pensions shows average payments into DC pensions in FTSE100 companies have quadrupled since 2009, while average assets held in those schemes have increased sevenfold over the same period.

Across the FTSE 350, the use of master trusts has doubled since 2015, from 8 per cent to 15 per cent.

Lifestyle investment strategies still predominate default options, but these have rapidly evolved to reflect the introduction of pension freedoms, the report says. Member investment charges have remained largely flat, with the average for FTSE100 schemes being 0.36 per cent per annum

The majority of schemes offer some level of at retirement guidance or advice to members, although trust-based schemes are more likely than contract-based schemes to provide access to a third-party service rather than a provider’s proposition, the report says.

The research found that today 54 per cent of FTSE 100 companies still offer DB pensions to existing members, down from 84 per cent in 2009. The research found 37 per cent of FTSE 100 companies have closed their DB schemes to future accrual for existing members – up from 29 per cent in 2015. For FTSE 250 companies the increase is from 37 to 42 per cent, and today only 27 per cent still have DB schemes open to existing employees.

Willis Towers Watson senior consultant Richard Sweetman says: “The impression we get from compiling this major survey is that the UK’s biggest employers are broadly happy with the scale of their commitment to DC pensions. However, we also see an appetite to look at ways of making arrangements work better, particularly in identifying the best vehicle for delivering DC, as seen in the emergence of master trusts, restructuring contributions to allow wider savings options, improving investment strategies and introducing enhanced member information and support around adequacy and retirement options.

“While the ongoing cost of DB will remain a major issue for employers, this survey provides hard evidence of the speed with which DC provision is establishing a dominant role in the UK pensions landscape. It also offers a valuable insight into the issues that are still to be addressed in ensuring this historic shift leads to better retirement outcomes for millions of tomorrow’s pensioners.”

JP Morgan Asset Management UK defined contribution VP Annabel Tonry says: “Given the volume of people now saving into DC and the number of companies contributing significant amounts to DC as evidenced by Willis Towers Watson research, it’s going to be crucial to get not only the contribution levels right but also the investment strategy. In the current lower return environment, which looks set to last for a long time, DC plans are going to have to focus on the now much harder task of achieving the same levels of returns for their members – asset allocation and diversification will be key.”