UK: Norwich Union calls for radical thinking on company pensions

New research from Norwich Union suggests that recent closures of defined benefit schemes are likely to increase over the next two years, with a marked acceleration in the number of outright closures affecting employees of larger private sector companies.

The research found evidence of declining employer commitment to occupational pension schemes.

Norwich Union believes radical thinking is needed to halt this trend; for the vast majority of people, providing a meaningful pension at retirement without significant employer contributions is impossible.

The key points from the research are as follows:

Closure of defined benefit schemes to existing members

• 11 per cent of private sector employers say that it is likely they will close outright their defined benefit schemes to both new and existing members in the next two years, compared to only 4 per cent who say they have done so in the last two years.

Closure of defined benefit schemes to new employees

• 23 per cent of private sector employers with defined benefit schemes say it is likely that they will close them to new employees in the next two years, whilst a further 23 per cent say that this action has been taken within the last two years.

Employer contributions

• Almost one in four employers contributing in excess of 10 per cent (of salary) to a defined benefit scheme consider it likely that they will close their scheme to new employees over the next two years.
• According to respondents, the average employer contribution to money purchase or defined contribution schemes is 5.8 per cent, significantly lower than the average of 11.0 per cent for defined benefit schemes*.
• According to respondents, the average employer contribution to Stakeholder schemes is 3.7 per cent.

Responsibility for avoiding pensions shortfalls

• When asked which combination(s) of employee, Government or employer should be responsible for helping employees avoid a major shortfall in income in retirement, 74 per cent of employers consider this to be the role of Government and employees, not employers.

Norwich Union believes that radical thinking is now needed to halt the trend of declining employer commitment to occupational pension schemes.

To help tackle the issue, three key ideas - which Norwich Union supports in principle - are to be researched by the insurer, and the findings from these will then be fed in to Government:

1. The Government to introduce a system of tax credits for employers, dependent on the employer's financial commitment to a pension scheme or the level of employee take-up.

   This would have an obvious benefit in incentivising pension contributions, but it could also have wider economic benefits by shifting the balance between the importance of pensions benefits compared to salaries, putting downward pressure on salary rises (and, therefore, inflation too), as well as pushing monies away from consumers and onto the stockmarket.

2. The Government to otherwise adjust the tax system so that there is more of a taxation incentive for employers to make a pension contribution than increase employee salaries.

   This would have a similar economic impact as suggestion 1. (above).

3. The Government to introduce a programme of education with the aim of creating a real understanding of the importance of pension provision at an early age.

   The objective is that employees recognise the value of a quality pension scheme as well as a competitive salary.

   Norwich Union believes that employer commitment to pensions would increase if employees demanded it. Currently, 56 per cent of employers say their employees do not take the company's pension contribution into account when considering their earnings.

Commenting, Iain Oliver, head of corporate pensions at Norwich Union, said: "During the last twelve months a growing number of well known large private sector companies have decided to close their final salary schemes to new employees, and some to their existing employees as well, which is a much more significant step.

"We anticipate that this trend will continue into the non-plc business sectors. We also expect an increasing number of schemes to be closed for existing as well as for new members.

"The Government will not make serious inroads into the so called 'savings gap' unless it can persuade private sector employers to offer a significant financial commitment to their pension schemes.

"Radical thinking is needed to incentivise employers of all sizes into direct action."

-Ends-

Press office contacts
		Out of hours
James Evans, Norwich Union	08703 66 68 78 or	07790 487105
Ian Beggs, Norwich Union	08703 66 68 71 or	07790 487533
Louise Goffee, Norwich Union	08703 66 68 70 or	07810 057362

Notes to editors

The research was carried out exclusively for Norwich Union by Simpson Carpenter Limited - by telephone interviewing of 1,003 employers between 20 March 2002 and 16 April 2002.

The target respondent was the company Pensions Manager (for larger employers) and the owner/Chief Executive/Finance Director (for smaller employers).

The samples were drawn from the membership of the National Association of Pension Funds (NAPF) and from Dun & Bradstreet (for the smaller employers). The sample was quota controlled by size and sector as follows:

NUMBER OF EMPLOYEES	SERVICE SECTOR	MANUFACTURING SECTOR	TOTAL
5-20	185	65	250
21-50	185	64	249
51-250	165	85	250
More than 250	180	74	254
	715	288	1,003

Of these 1,003 employers, a total of 363 offered defined benefit schemes.

Background to decline in defined benefit schemes

Government pension policy is heavily reliant on the principle of employer involvement in pension provision, both from the point of view of providing employees with access and contributing to their schemes.

Historically, most large employers have provided "defined benefit" schemes (also known as final salary schemes), which guarantee a certain level of pension at retirement and are financed by variable employer contributions depending on the relationship between scheme assets and liabilities.

Defined benefit pension schemes, particularly those offered by the largest organisations, are currently in a state of nervousness due to increasing financial pressures.

This has been caused by:

• Volatile equity markets, which have significantly reduced the value of scheme assets. Anticipated future investment growth is also lower than before.
• the fact that people now live longer in retirement and interest rates are currently at a low level, which therefore increases the cost of pensions,
• significant regulatory and tax change over the years, bringing increased costs for employers,
• the introduction of new accounting practices which have the effect of making scheme liabilities transparent to shareholders (FRS17).

As a result, a number of larger companies have reined back their commitment to defined benefit schemes.

Independent research by financial services consultants Oliver, Wyman and Company calculated that there is an annual savings gap in the UK - between what people are and should be saving - of Ł27bn, with those on lower incomes most in need of saving more.

*  This average excludes employers taking a temporary contribution holiday on their defined benefit scheme.

Norwich Union is the UK's largest insurer. It is the UK's largest provider of life, pensions and investment products and one of the leading IFA providers. IFAs provide around 75% of the company's long-term savings business.

Norwich Union has strategic alliances with over 20 building societies and other leading UK brand names including Tesco Personal Finance Limited and The Royal Bank of Scotland Group.

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