It’s getting increasingly expensive for companies to offer a defined benefit pension plan.
Employer contributions to U.K. pension schemes rose considerably in 2017, according to a report by the Pension and Lifetime Savings Association. This year, the PLSA said its member funds made contributions worth 28 percent of the average employee’s salary, an increase from 24.2 percent last year.
Employers have been required to pay more into their pension plans as funding levels decline and schemes cut allocations to equities. The average funding ratio was 93 percent in 2017, down from 99 percent in 2015, according to the PLSA.
The group’s 43rd annual report, released on Friday, was based on responses from 176 plan sponsors with £517 billion ($700 billion) in total assets. Of these respondents, 135 operated defined benefit schemes, representing £368 billion in assets.
Former U.K. pensions minister Steve Webb, now director of policy at Royal London, told Institutional Investor the increase in the contribution rate was “quite significant.”
“That is nearly a four-percentage point increase by employers,” he said. “Think about that. If the government stood up and did that with National Insurance, there would be a riot. In a way, it prompts the question: What is it that is keeping the last remnants of DB going? How expensive will it have to get?”
Webb suggested that some of the companies still maintaining defined benefit schemes may be smaller employers or firms that only offer pensions to directors.
The PLSA survey found that 10 percent of defined benefit plans were still accepting new members as of 2017, a figure that was unchanged from 2016. In 2015, 21 percent were open to new members, according to last year’s report.
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The cost of operating pension schemes also increased, with defined benefit plans reporting they paid an average of £612 per member in 2017, up from £546 per member in 2016. The PLSA attributed this change to increasing costs for compliance, record keeping, and trustee training, as well as rising member communication and administration costs.
Smaller schemes were hardest the hit by growing operating expenses, according to the report. Plans with under 5,000 members paid £868 per member to run their schemes, more than double the £479 per member paid by larger pension plans.
Part of this cost burden can be explained by transfer requests from members, according to the PLSA. More than a third of survey respondents said they received requests for a transfer value from their members during the year.
In a separate survey, the Association of Consulting Actuaries found that a third of DB schemes had received transfer requests from more than 10 percent of their members.
