- Defined Benefit schemes: scheme closure rate slows but challenges remain
- Defined Contribution schemes: member growth with advent of automatic enrolment and average annual management charge low at 0.46%
- Investment strategy trends: steady move from equities to alternative assets
Released today (Thursday, 5 December 2013) the National Association of Pension Funds’ (NAPF) 39th Annual Survey provides the most comprehensive insight into UK occupational pensions.
Defined Benefit schemes
The rate of closure of Defined Benefit (DB) schemes eased this year, with 12% of private sector DB schemes remaining open to new members. This represented very little change on a year-on-year basis (a drop of 8%) and significantly less than the drop of almost a third from 2011 (19%) to 2012 (13%). The number of schemes closed to both new members and future accruals rose to 35% from 31% in 2012. The number of schemes closed to new members, but open to future accruals, dropped to 53% from 55% in 2012.
Commenting on the survey, Joanne Segars, Chief Executive, NAPF, said:
“Pension funds are already grappling with significant economic and longevity issues. While it’s good to see a slower rate of DB scheme closure this year, they still face significant challenges. Of the DB schemes open to new members or future accruals that responded to our survey, 88% are still contracted out, representing a membership of nearly two million people. They face uncertainty about how the State Pension reform will affect them, for example the significant additional costs from the loss of the National Insurance rebate. That is why the NAPF is calling on the Government urgently to bring forward solutions to help schemes navigate these changes.”
Defined Contribution schemes
The survey covered 950,000 DC members (805,000 active and 145,000 deferred), a 37% increase from 2012. The average contribution rate was 12.1%, with 8% coming from the employer.
On average, respondent DC schemes offered 13 different investment funds to their members and nine out of ten offered a default fund. Where available, the vast majority of members (84%) are likely to remain in the default fund. Most (96%) of the scheme default funds use a lifestyle strategy for members approaching retirement and, on average, investment funds review their default fund every three years.
Most (91%) schemes made some form of charge to members: 79% made an annual management charge (AMC), by far the most common method of charging; and 77% of schemes said the employer paid the costs of external advisers. The average AMC for a DC scheme was 0.46%, within a range from 0.004% to 1.2%.
Three quarters (75%) of respondents told members about the open market option for annuities, up from 68% in 2012, while 60% encouraged members to obtain independent financial advice. Only 6% reported they offered scheme members no support at all.
Commenting on the survey, Joanne Segars, NAPF, said:
“With 80% of DC members remaining in a default fund, the fund’s design and investment strategy are crucial. But charges also affect member outcomes; it is important that charges are both transparent and reasonable, and, while the average charge was 0.46%, the range in this year’s survey was wide. In November 2012 the NAPF published a join industry code of conduct – Pension Charges Made Clear. Awareness of, and commitment to, the code is growing – 85% of our survey respondents had heard of the code and three quarters planned to implement it. We still want to see more schemes offering at-retirement services that help scheme members select the best product, as our research shows that retirees each year could be £1 billion better off if they secured a good annuity deal.”
DB investment strategy trends
The appetite for de-risking continues to grow among DB schemes. Four out of ten DB respondents reported that their appetite for liability matching assets had increased in the last 12 months. Over a third of DB schemes had invested in commercial real estate and a further 11% had considered investing in it. Of those who responded, almost a quarter (23%) of DB schemes had made some investment in infrastructure and a further 18% had considered investing.
Commenting on the survey, Joanne Segars, NAPF, said:
“In an economic climate of long-term low interest rates, funds are considering how to broaden their investments. The NAPF has argued strongly for some time that it should be easier for institutional investors to invest in infrastructure as an asset class, and our survey shows growing member interest in this form of investment.
“We’ve seen a significant level of interest in the Pensions Infrastructure Platform from pension funds, and the Government’s National Infrastructure Plan 2013 is also welcome. However, the Government’s plan must provide a pipeline of assets that are suitable investment vehicles for pension funds, including assets with strong inflation-linkage to help pension funds match their liabilities.”
Notes to editors:
- The NAPF is the leading voice of workplace pensions in the UK. We speak for 1,300 pension schemes with some 16 million members and assets of around £900 billion. NAPF members also include over 400 businesses providing essential services to the pensions sector.
- An executive summary of the survey is available on request from the NAPF press office.
- 263 NAPF members took part in the survey, covering nearly 890 funds. Taking all the schemes together, the survey covered a total of nine million scheme members and £706 billion of assets.
- Private sector DB schemes covered by the survey had 5.8 million members and held £607 billion of assets.
- Of the DB schemes open to new members or future accruals that responded to our survey, 88% are still contracted out, representing a membership of nearly two million people. The majority of respondents had not yet discussed how to deal with the loss of the NI rebate. Of the remainder: 32% thought they were likely to close the scheme; 36% thought they were likely to change the accrual rate; and 25% thought they were likely to increase employee contributions.
- DC schemes covered by the survey had 950,000 members and £11 billion of assets.
- The proportion of private sector DB schemes closed to both new members and future accruals for existing members continued to increase from 31% in 2012 to 35% in 2013.
- The average pension paid to scheme members by DB respondents was £8,100 (£7,619 in 2012). The median stood almost unchanged at £6,674.
- 30% of total private sector DB scheme assets in the survey were invested in equities, 40% in fixed income and 30% in other asset classes.
- 34% of trustee boards (DB and DC) covered by the survey were chaired by an independent trustee.
- 33% of schemes did not pay any of their trustees and 9% paid all of their trustees in some way.
- 714 NAPF fund members were invited to take part in the online survey between 11 July 2013 and 30 August 2013.
- 263 members responded, giving an overall response rate from our fund members of 38% (the same as in 2012).
- The PIP will be a new, not-for-profit, infrastructure fund, by pension funds and for pension funds, aligned to the long-term interests of the UK pension funds who will be its main investors. This is the first time UK pension funds have combined to create such a financial entity in the UK. Key features of the PIP are:
- Target size of £2bn
- Low leverage
- Low fees, c50bps
- Low risk, the PIP is expected to invest at the low-risk end of the infrastructure asset spectrum, and in projects free of construction risk
- Inflation-linked, fund is seeking long-term cash returns of RPI+2-5% (i.e. as a liability match)
Lucy Grubb, Head of Media and PR, 020 7601 1726 or 07713 073023, [email protected]
Dee Sullivan, Communications Adviser, 020 7601 1717, [email protected]