2.2 million private sector employees drop out of UK defined benefit pension schemes

The scale of the UK’s pensions woes is “worse than originally feared”, a think tank has warned.

A report by the Policy Exchange found that just 15% of private sector employees were members of defined benefit schemes, such as final salary pensions, while only 4% belong to schemes still open to new members.

Final salary schemes, which are based on length of service and salary, are being replaced by money purchase schemes, the value of which depends on how much the employee and the employer put into the fund.

The report, Quelling the Pensions Storm, found just 3.4 million private sector workers have a ‘defined benefit’ scheme, a dramatic decline since 1991 when 5.6 million were members of such a scheme.

Nicholas Hillman, the report’s author, said: “Quelling the storm will need three changes. First, we need braver deregulation for private occupational pensions, as well as lower costs for public sector schemes.

“Second, instead of spending four years designing an entirely new system of personal accounts, employees should be automatically enrolled into existing products, such as stakeholder pensions.

“Third, we should recognise that earnings-related state pensions do not work. A single-tier state pension would be much more comprehensible than the current basic state pension and state second pension.”

It follows an earlier survey by the National Association of Pension Funds which found that the workplace pension is the most important benefit an employer can offer.