Just 13% of final salary pensions were open to new joiners in 2012, a drop of a third from 19% in 2011, and the steepest fall since comparable data began in 2005, when 43% were open.
The latest NAPF Annual Survey also revealed that these ‘defined benefit’ pension funds are increasingly closing to the workers who are already in them. The number that shut their doors to existing staff climbed to 31% in 2012, a hike of over a third from 23% in 2011.
These pensions have long been under pressure from rising longevity, red tape, and poor investment returns. But the NAPF believes the higher liabilities created by quantitative easing and low gilt yields have prompted a barrage of fresh closures.
However, the survey also shows that total contributions from both employers and employees into the newer type of ‘defined contribution’ pensions edged to an all-time high of 12.5% of salary in 2012, which is well above the 8% minimum that auto-enrolment requires.
Joanne Segars, NAPF Chief Executive, said:
“The pressures on final salary pensions have proven too great for many businesses. The growing liabilities fuelled by quantitative easing will have been a factor behind the record hike in closures.
“Those starting a new job in the private sector have next to no chance of getting a final salary pension. What was once the norm is now a very rare offer. And those who are currently saving into one may find it gets closed.
“We are in the midst of a pension regime change. Auto-enrolment will bring millions of workers into a new breed of pension that will come to dominate in the private sector. It is encouraging that savings into these pensions have reached a new high, despite the tough economic conditions.
“While many have closed their doors, private sector final salary pensions are far from finished. More than two million workers are still saving into one and they pay the pensions of over four million pensioners. It is essential that the Government shows them more support in managing some extremely testing economic circumstances.”
The survey shows that the few remaining private sector pensions which are still open to all staff will see big changes in the next five years. Almost half (46%) are planning to close the pension to new staff, and offer them a defined contribution pension instead.
Similarly, a third (29%) of those pensions closed to new joiners but still open to future contributions from existing staff said they would make changes in the coming years, including closing the scheme or making it less generous.
The NAPF Annual Survey, now in its 38th year, covered a total of 1,018 pensions with 9m members and £628bn. The survey also found:
- Less than 10p in every £1 of pension fund assets is now invested in shares in UK companies. The proportion of total assets invested in UK equities fell from 12.2% in 2011 to 9.9% in 2012. Meanwhile, the allocation to corporate bonds rose from 12.4% in 2011 to 15.1% in 2012.
- Two thirds (68%) of sponsoring employers have already decided which pension scheme to use for auto-enrolment, and a third (30%) have an employee communication plan in place. The anecdotal evidence suggests levelling down – where employers reduce pension contributions to the new legal minimum – is unlikely to be a widespread issue.
- The creation of a new single-tier state pension will mean the end of contracting out. Of the defined benefit (DB) pensions that are open to new members or future accrual, 17% were contracted in, but 83% were still contracted out.
- The costs of running a DB pension in the private and public sectors rose in some areas. Mean costs for fund management and custody increased from £170 per member in 2011 to £186 in 2012. Fees to consultants increased from £98 last year to £116.
- A third year of pay freezes for local government workers and changes to the Local Government Pension Scheme (LGPS) being introduced from 2014 are putting financial pressure on LGPS members. 25% of LGPS respondents said their opt-out rate had increased, while none reported that their opt-out rate had fallen.