UK - The UK's 2012 pension reforms could double the membership of defined contribution (DC) schemes, although questions remain over whether they will be capable of providing sufficient retirement income in the future, according to the Office of National Statistics (ONS).

In an update to chapter six of its Pensions Trends series, on private pensions, the ONS said 90% of active members of occupational pension schemes, or 7.9 million individuals, belonged to defined benefit (DB) schemes in 2007, of which two-thirds were in the public sector.

However, a quarter of active members in private sector occupational schemes - 900,000 - were members of DC schemes, which combined with the 6.9 million people contributing to personal pensions in 2006/07 resulted in an estimated total active membership of DC funds of 7.8 million.

This is only 100,000 people less than those with DB membership, and the ONS admitted "there is a small element of double counting here, as some individuals with occupational pensions may also contribute to personal pensions".

Further figures in the report revealed two-thirds of active members of occupational pensions were in a funded scheme in 2007, 41% of which were in the private sector and 23% were public, while unfunded schemes - such as the National Health Service (NHS) scheme - accounted for 37% of all active membership.

That said, the report's authors suggested that the introduction of the 2012 reforms - automatic-enrolment and the introduction of the new trust-based DC personal accounts scheme - "is likely to be the biggest event in the UK private pension system since the 1980s, as it should extend coverage to millions of employees who currently lack a private pension".

In particular, it suggested that as personal accounts will be established as a DC scheme, it is assumed that most of the expansion in pension coverage will take place through personal accounts and other DC schemes, so "the 2012 reforms could double the membership of DC schemes".
 
The ONS therefore pointed out that instead of DB and DC pensions having similar numbers of members, "by the end of the next decade the split in pension scheme membership will be closer to one-third DB and two-thirds DC".

However, it warned this increase in coverage "raises the question of whether DC pensions will be capable of providing sufficient pension income for future generations of pensioners", as the UK already has a 'pension gap' of 28% - the difference between the average OECD replacement rate of 59% and the UK's 31% - so it needs "relatively high private pension contribution rates to close the gap".

For example, with a real rate of investment return of 3.5% the average contribution for earners with a full work history is 5.8%, but someone with 10 missing years of contributions would have to 7.9% of earnings, while an individual 20 years' short of a full career history would have to pay 11.6% into a DC scheme.

The ONS also noted different investment returns can affect contribution levels, so a return of 2% for a worker with a full career history would increase payments to 8.4%, while a return of 7% would reduce contributions to 2% of earnings.

It added: "This variability of DC pensions may be an issue for the future of the private pension system. Some individuals may do better than expected, while others may do worse. Therefore average DC pension outcomes are not sufficient as a measure of whether DC pensions are delivering the benefits expected by pension savers."

This is because even if people do well 'on average', "the system as a whole may fail to meet people's expectations if significant numbers of individuals receive below-average pensions from DC pension schemes".

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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