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Laurel Boars
Laurel Boars

Personal Pensions And The Pensions Industry



Employee participation in workplace pensions reflects the automatic enrolment (AE) age (aged 22 years to State Pension age) eligibility; in April 2021, around 8 in 10 eligible employees had a pension compared with 2 in 10 employees aged 16 to 21 years, and 4 in 10 aged State Pension age and over.




Personal Pensions and the Pensions Industry



Increased participation in occupational defined contributions (DC) pensions is the main contributor to overall growth in workplace pension participation since 2012. This has resulted in DC pensions being dominant since 2019.


Prior to 2019, occupational defined benefit (DB) pensions were the dominant pension among employees. However, it has seen limited growth, including a small decline over the past decade. In the year to April 2021, participation has grown by 1 percentage point to 28%. This was driven by increased employment in the public sector, as the NHS and civil service responded to the coronavirus (COVID-19) pandemic.


In the private sector, 39% of employees contributed to defined contribution (DC) pensions, up 2 percentage points since April 2020. Employee participation in defined benefit (DB) pensions decreased to 7% from 8% in April 2020.


In the public sector, 82% of employees contributed to DB pensions, up 2 percentage points since April 2020. This was mainly driven by more employees contributing to a pension as opposed to not contributing.


A pension other than the state pension (made up of the Basic State Pension and the additional state pension). It includes all workplace (occupational or group personal pensions, including those for public sector employees) and individual personal pensions.


A workplace pension is a pension which is provided or facilitated through a workplace, principally for employees. It includes both occupational pension schemes and all forms of group personal and group stakeholder pensions.


An occupational pension scheme is an arrangement (other than accident or permanent health insurance) organised by an employer (or on behalf of a group of employers). It is to provide benefits for employees on their retirement and for their dependants on their death. Occupational pensions are also referred to as trust-based and are a form of workplace pension.


A defined contribution (DC) scheme is a pension scheme where the benefits are determined by the contributions paid into the scheme, the investment return on those contributions and the type of annuity (if any) purchased upon retirement. It is also known as a money purchase scheme. DC pensions may be occupational, personal or stakeholder pensions.


A group stakeholder pension (GSP) is an arrangement made for the employees of a particular employer, or group of employers, to participate in a stakeholder pension on a group basis. This is a collecting arrangement only; the contract is between the individual and the pension provider, normally an insurance company. GSPs are a form of workplace pension. Group stakeholder pensions were first introduced in 2001.


A personal pension is an arrangement where the contract to provide contributions in return for retirement benefits is between an individual and an insurance company. Such plans may be taken out by individuals on their own initiative. For example, to provide a primary source of retirement income for the self-employed or to provide a secondary income to employees who are members of occupational schemes. These would not be covered in the Annual Survey of Hours and Earnings (ASHE) results. Alternatively, they may be facilitated by an employer. These pensions are covered by ASHE and include GPPs and GSPs. Personal pensions are a form of DC pension.


The Annual Survey for Hours and Earnings (ASHE) is based on employer responses for a 1% sample of employee jobs. It uses HM Revenue and Customs' Pay As You Earn (PAYE) records to identify individuals' current employer. Employee membership in ASHE is measured in terms of "employee jobs" rather than individuals, and individuals may have more than one job. Data from the ASHE is available from 1997 onwards only. However, it is the most useful source of information because it covers all workplace pensions: occupational pension schemes, group personal pensions (GPPs), group stakeholder and group self-invested personal pensions.


As ASHE only covers workplace pensions, which are those that are either provided or facilitated by employers, it does not cover individual personal or stakeholder pensions. This is where individuals enter into a contract with an insurance company that is not facilitated by an employer. Nevertheless, ASHE may overestimate pension scheme membership as its sample is drawn from the PAYE system. This is because low-paid workers earning below the PAYE threshold, who are less likely to belong to a pension, may be under-represented.


The occupational defined contribution category includes employees who have pensions with the National Employment Savings Trust (Nest). Data for group self-invested personal pensions (GSIPPs) are a type of GPP, data for GSIPPs are included within the category GPP throughout this bulletin. The survey results are used widely to analyse pension participation and to monitor the impacts of pension reforms.


ASHE collects information on employee membership of the current employer's workplace pension scheme. This does not include preserved rights in any former employer's pension scheme or pensions paid by former employers.


Congress set up PBGC to insure the defined-benefit pensions of working Americans. Defined-benefit pension plans are traditional pensions that pay a certain amount each month after you retire. If you have a pension from a private sector job, you are probably one of over 33 million Americans covered by PBGC insurance protection. PBGC insures more than 25,000 pension plans.


These trends threaten to shake up the American retirement system as we know it because of vast differences between DB and DC pension plans, including differences in coverage rates within a firm, timing of accruals, investment and labor market risks, forms of payout, and effects on work incentives and labor mobility. DB pensions are tied to employers who, consequently, bear the responsibility for ensuring that employees receive pension benefits. In contrast, DC retirement assets are owned by employees who, therefore, bear the responsibility for their own financial security.


This article simulates how the shift from DB to DC pensions might affect the distribution of retirement income among boomers under two different pension scenarios: one that maintains current DB pensions, and one that freezes all remaining DB plans in addition to a third of all state and local plans over the next 5 years. The analysis uses the Social Security Administration's (SSA's) Modeling Income in the Near Term (MINT) microsimulation model to describe the potential impact of the pension shift on boomers at age 67. The article examines both changes in retirement income and the numbers of winners and losers, and it compares these outcomes among individuals grouped by sex, educational attainment, marital status, race/ethnicity, years of paid employment, and quintiles of lifetime earnings and retirement income. Of principal concern is whether income from increased DC plan coverage will compensate for the loss of DB plan benefits.


The future of pensions remains uncertain as even employers with financially healthy DB plans consider whether to eliminate them over time. By December 2006, many American companies had instituted "freezes" in their DB pensions and replaced them with new or enhanced DC pensions (Smith and others 2007; VanDerhei 2007). In its survey of single-employer DB sponsors, the Government Accountability Office (2008) found that about half had one or more frozen plans; 23 percent of plan sponsors had completely frozen their plans with no further benefit accruals (hard freezes), and 22 percent had frozen either the years of service or the salary pension base. In 2007, a survey of private-sector DB plan sponsors by Mercer and the Employee Benefits Research Institute found that over a third of DB sponsors had recently frozen their DB pension plans, and a third of the remaining employers expected to freeze or close their plans in the next 2 years (Vanderhei 2007). Some experts expect that most private-sector plans will be frozen or terminated within the next few years (Aglira 2006; Gebhardtsbauer 2006; McKinsey & Company 2007).


This is essentially what happened in the United Kingdom (U.K.) with private-sector DB pensions. When the British adopted transparent financial accounting standards and the government taxed pension plan accumulations it deemed to be excessive, the percent of assets "in terminated or frozen status" increased from 35 percent in 1998 to 70 percent in 2006 (Munnell and Soto 2007). A Towers Perrin 2008 survey of private employers in the United Kingdom documented the shift away from DB pensions through plan freezes and found that the percentage of new employees able to join a DB plan declined from 67 percent in 2002 to only 11 percent in 2008. Almost half of employers surveyed expected to make further changes to their pension schemes in the next 5 years, partly in response to personal account legislation proposed to become effective in 2012 (Towers Perrin 2008).


With each job separation, MINT projects that some workers cash out their accumulated DC balances. The probability of cashing out is higher for younger workers than for older workers and higher for those with low account balances than for those with high account balances. Vested workers take-up DB benefits at the latter of the plan's early retirement age or projected retirement age. Workers selecting a joint and survivor pension receive a reduced benefit with a 50 percent survivor annuity. MINT assigns a cost-of-living adjustment (COLA) to pensions based on sector prevalence.8 See Toder and others (2002) for more details about the treatment of COLAs in the MINT pension module.


MINT projects DB pensions using the Pension Benefit Guaranty Corporation's (PBGC's) Pension Insurance Modeling System (PIMS). DB plan formulas, which are randomly assigned to DB participants, are based on broad industry, union status, firm size categories, and whether the firm offers dual (DB and DC) coverage.10 MINT uses actual benefit formulas to calculate benefits for federal government workers and military personnel, and uses tables of replacement rates from the Bureau of Labor Statistics to calculate replacement rates for state and local government workers. The model projects conversions of pension plan type (from DB to CB or DB to DC) using actual plan change information for plans included in the PIMS data.


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