Last year was an exciting year for pensions, particular defined contribution schemes. The Government...
Last year was an exciting year for pensions, particular defined contribution schemes. The Government's Green Paper on welfare reform heralds some of the most far reaching changes to the UK pensions system for over decade. If successful, the introduction of stakeholder pensions will lead to much greater pension coverage and will provide further support to the continuing trend towards defined contribution pension provision,
In this year's survey, we have gathered more detailed information about the investment options made available under defined contribution schemes. We also asked respondents to tell us about the arrangements they have for the investment of additional voluntary contributions (AVCs). We hope to build further on this research in next year's survey.
We are likely to see many changes to the defined contribution market over the next 12 months. The introduction of a single tax regime for defined contribution scheme is likely to increase the popularity of these arrangements. At this stage, however, it is unclear as to how the proposed stakeholder schemes and the existing types of defined contribution scheme will interact. Will stakeholder become the main defined contribution vehicle or just a simple, low cost version of existing occupational products?
It will be some time before the position becomes clearer but, whatever the format, it looks like defined contribution is here to stay.
Size of the market
The use of defined contribution schemes has continued to grow this year. Of all respondents, 23% operate a defined contribution pension scheme either in isolation or in addition to a defined benefit scheme. The table shows the prevalence of defined contribution provision within those organisations that currently operate defined benefit schemes.
This shows that over 20% now operate some form of defined contribution arrangement with a large proportion of others actively considering it.
For all defined contribution schemes, we asked to which employees the scheme was offered. The results are shown in the pie chart.
Types of scheme
Of those operating defined contribution schemes, the proportion operating group personal pensions has remained static at 15% of respondents. Of these, 5% are operated in addition to an occupational money Purchase scheme, perhaps as a vehicle for members wishing to contract out of the State Earnings Related Pension Scheme (Serps).
These figures belie the increased interest in group personal pensions reported elsewhere but perhaps reflect the fact that our survey's respondents are generally large organisations that have traditionally preferred occupational provision. Also, occupational arrangements often fit more comfortably with existing defined benefit schemes.
The future of group personal pensions is currently uncertain. Many commentators believe that they will be largely displaced by, stakeholder pensions. Others argue that the intended design of stakeholder pensions is now so similar to personal pensions that there is little point in distinguishing between the two.
A surprisingly high proportion of employers/ trustees limit the flexibility given to members in deciding how contributions, particularly employer contributions, are invested. The table shows the latitude given to members for each type of contribution.
In the bar chart we show the proportion of respondents offering various investment options under their main defined contribution plan, and where offered, any AVC facility external to the main plan, An external AVC facility is offered to members by 45% of respondents,
Lifestyle continues to be a popular choice for main plan investment being offered by 48% of respondents compared to 38% last year. For AVCs, the more traditional investment options, such as with-profits, still dominate.
For main plan investment, 75% of organisations use the funds of a single investment management organisation. The administrative complexity and cost of offering a number of providers and the relatively small size of most schemes may be factors here.
Previous years' surveys have shown a trend away from in-house administration of defined contribution schemes with a corresponding rise in the use of actuaries and other specialist administration providers. Figure 21 shows that this year there has been a move towards the use of investment management organisations as administrators.
This probably reflects the fact that many such organisations have teamed up with specialist administration providers and so can offer a better quality service in this area than previously.
We asked respondents to tell its who meets the investment management and administration charges - the member, the employer or both.
The employer meets the investment management charges in a surprisingly high proportion of schemes given that this cost will rise significantly as the value of assets increases.
This is an extract from Phillips & Drew's Investment Directions - Survey of Investment Management Arrangements 1999
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