November 13, 2007 / 2:53 PM / 12 years ago

Blue chips offer higher pension payments

LONDON (Reuters) - Blue-chip UK firms are offering higher payments to employees enrolled into defined-contribution (DC) company schemes to ensure they get a reasonable income in retirement, a survey by pension consultant Watson Wyatt said.

The survey released on Tuesday, which was based on 94 companies within the FTSE 100 at March 31, showed “a step change in how the DC issue is being tackled,” Gary Smith, a senior consultant at Watson Wyatt told journalists. “Big firms are taking it seriously.”

The equity market plunge in the early 2000s, coupled with longer life expectancy, among other factors, prompted many firms to close their defined-benefit (DB) pension schemes in favour of defined-contribution schemes for new employees.

Politicians and pensions experts have warned that many members of DC schemes are not saving enough to pay them a reasonable pension, compared to their colleagues in more lucrative DB schemes.

DB schemes guarantee the level of income employees will receive when they retire, whereas DC schemes simply provide workers with a pot of money, the size of which is dependent on conditions in the investment markets.

But the Watson Wyatt survey showed that contribution rates into DC schemes had been increasing over the past four years and that firms were willing to reward workers who chose to put in extra personal payments, by offering them extra top-up payments.

The average overall contribution rate to DC pensions was up by 1 percentage point to 14.7 percent in 2007 — edging towards the key figure of 15 percent quoted in the Turner Report on pensions reform and a level regarded by experts as being the minimum to offer individuals a reasonable level of pension.

But this figure assumes workers are paying in the maximum personal contribution to take advantage of matching extra employer payments. Watson Wyatt said it had no means of working out whether workers were paying in this much to their schemes.

AVERAGE REMAINS TOO LOW

The average core contribution rate to the FTSE 100 schemes surveyed, or the minimum amount payable by both the employee and employer, was 8.4 percent in 2007 — still some way short of offering most employees a comfortable level of pension.

The take-up rate for DC pension schemes among employees remains a worry too, the survey showed. Only just over half of the schemes have more than 80 percent of eligible workers signed up to the plan.

Thirty-nine percent of companies surveyed automatically enrolled new employees into their DC scheme. Some pension experts have advocated the use of auto enrolment to ensure workers have occupational pensions, but Watson Wyatt said these people often paid too little attention to their pensions.

Auto enrolled members “tend to assume that just being in the scheme is sufficient”, said Paul Macro, a senior consultant at Watson Wyatt, often doing little work to see if they are paying in enough or whether the investment option in which they are enrolled makes most sense for them.

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