UK - Companies appear to be restructuring their defined contribution (DC) pension schemes ahead of the 2012 reforms to give higher contributions to employees who are engaged and contribute more themselves, according to Towers Watson.

In its annual survey of FTSE 100 DC pensions, the study revealed the average maximum contribution made by employers to their DC pension schemes has increased to 16.5%, up from 15.3% in 2009 and 13% in 2004.

Towers Watson noted 88% of FTSE 100 employers offer DC pensions, and the average maximum contribution - if employees take advantage of the full ‘matching contributions’ process - comprises an average employer payment of 10.6% and 5.9% from the employee.

That said, the consultancy firm suggested this is being driven by a requirement to auto-enrol members into a qualifying scheme from 2012. In particular, it warned many companies will have to make design changes to their schemes anyway, not because they provide low contributions but because the 2012 rules use different criteria to determine who is eligible to join and what counts as “qualifying earnings” to calculate the minimum 8% contribution.

Paul Macro, senior DC consultant at Towers Watson, said: “Companies are restructuring their pension schemes so that more of the money they contribute goes to those employees who are likely to appreciate it the most: that is, those who are willing to contribute more than the minimum themselves.”

He added this is a trend “we expect to continue in the run-up to 2012”, as the requirement to auto-enrol employees could result in high costs for the 56% of schemes that do not currently use this process as it is expected take up rates will increase.

Of the 44% of FTSE 100 firms using auto-enrolment, Towers Watson said 61% have take-up rates of more than 90% among its staff, compared to 55% of firms in 2009.

Macro said while DC take-up rates are high for many companies, “at the other end of the scale there are some companies with currently low take-up rates and the impact of the 2012 changes could be very significant. Some 15% of FTSE 100 companies with DC schemes have less than 20% take-up rates and currently none of these auto-enrol.”

“Companies may look to redesign their schemes so the base level contributions are near the legal minimum [8% of banded earnings with 3% from employer], while weighting higher contributions towards those employees who are engaged and willing to contribute more,” he added.

This is in contrast to figures from the Office of National Statistics (ONS) earlier this week, which suggested employer contributions to self-administered schemes - mainly defined benefit (DB) schemes run by trustees or investment managers - dropped from £11.9bn in 2007 to £6.8bn a year later. (See earlier IPE article: UK pensions reduced by £165bn in 2008)

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