The provision of pension benefits has long been a core part of most
remuneration packages. Typically, larger employers set up occupational pension
schemes with the traditional benefit on offer being a ‘final salary’ scheme.
Such a scheme would typically provide one-sixtieth of an employee’s final
salary multiplied by the number of years’ service, usually capped at 30 years
or so. Thus, employees have received reliable pension benefits against which
they could plan their retirement.
The cost to the employer of such schemes has, however, risen considerably in
recent years, due to low interest rates, increased bureaucracy and legal
obligations (for example, FRS17) and increased life expectancy. Another
disadvantage of final salary schemes is the uncertain level of contributions
that employers need to make to meet the promised benefit.
In recent years, therefore, defined contribution pension benefits – known as
‘money purchase’ schemes – have become much more common. In these schemes, the
employer promises to contribute a certain amount – usually a percentage of an
employee’s pensionable salary – to a staff pension scheme each year. This suits
employers as they can precisely budget their outlay on pensions.
By and large, employees have not complained hugely about these schemes,
since they do provide at least some pension benefit. They do not, however, give
the employee the peace of mind that a final salary pension scheme does, as the
level of pension that will be paid when the employee retires is not
Much research has been published recently demonstrating the dramatic
fall-off in the provision of final salary pension benefits to UK employees. The
basic driver for this is easy to see – a typical final salary scheme costs the
employer about 15 per cent of pensionable payroll, gives it higher admin costs
and uncertain contribution rates. Typical money purchase pensions costs
employers around half this level, with no potential headaches.
This move is not all bad, since, in the main, only long-serving employers
did well out of final salary schemes, and long-term employment is now
The role of Government
The Government is concerned about the lack of pension benefits for poorly
paid employees. To try to redress this issue it introduced ‘stakeholder’
pension schemes, which are now compulsory for employers with more than five
employees, unless there is already a pension scheme in place that meets certain
Essentially, stakeholder pensions are simple, low-cost personal pensions.
However, there is no minimum level of contribution for employers, which means
that the Government’s concerns are far from being resolved.