Page last updated at 13:13 GMT, Friday, 9 April 2010 14:13 UK

Pension contributions fall due to recession

Two pensioners
Hard times have hit pension savings by both employers and individuals

The onset of the recession in 2008 led to the first drop in total pension contributions in the UK since current records began in 1995.

Figures from the Office for National Statistics show that combined employer and employee contributions fell from £86bn in 2007 to £82bn in 2008.

The figures relate to all non-state pension schemes.

The ONS said the main reason was a fall in the amount of money some employers paid in on their employees' behalf.

"The fall was driven by a decrease in employer contributions to funded occupational pension schemes, which fell from £37bn in 2007 to £33bn in 2008, as company finances came under pressure," the ONS said.

Employer contributions... fell sharply in 2008, to £33bn, as company finances came under pressure at the start of the recession

"Employer contributions to personal pensions and to unfunded (public sector) occupational pension schemes rose in 2008, but not enough to prevent a drop in total contributions," it added.


Between 2001 and 2007 the amount of money that employers and individuals paid into their pension schemes had risen strongly; from £49.6bn to £86bn.

Most of that was due to higher employer payments made to funded company schemes.

"This was likely to have been associated with the requirement to finance deficits in private sector defined benefit pension schemes," said the ONS, in the latest edition of its Pension Trends publication.

"However, employer contributions to funded occupational pension schemes fell to £37bn in 2007 as many private sector defined benefit schemes moved into surplus, and then fell sharply in 2008, to £33bn, as company finances came under pressure at the start of the recession," the ONS added.

The recession also seems to have dented the ability or willingness of individuals to make contributions to personal pension schemes.

Theses payments fell, from £11bn in 2007 to £10.3bn in 2008.

"The contributions employers paid in 2008 reflected agreements hammered out with trustees before the financial crisis struck, when deficits were smaller," said Rash Bhabra at pension consultants Towers Watson.

"When this is the reason, less money going into pensions can actually be good news but it won't last long.

"Following fresh valuations, companies will have to pay more each year or take longer to clear their deficits. Many will do both," he predicted.

Higher-paid staff

The ONS research also highlights the continued difference in the contributions employers make to their traditional final-salary schemes compared to their increasingly common defined contribution schemes.

In 2008 the average employer contribution rate for a final-salary scheme was 16.6% of salary, up from 15.6% in 2007.

However, employers paid in just 6.1% to defined contribution schemes in 2008, down from 6.5% the year before.

Defined contribution schemes are the ones now typically offered by most employers to new recruits.

Increasingly employers have been seeking to move current members of staff to them as well, and closing their final-salary schemes to any more contributions from existing employees.

The ONS figures show that defined contribution arrangements tend to favour higher paid members of staff far more than lower paid employees.

In 2009, staff working in sales or customer service had the lowest combined pension contribution rates, with 59% of them benefitting from total contributions, both from themselves and their employer, of less than 8% of their pay.

By contrast, managers and senior officials had much more generous contribution rates, with 25% of these staff enjoying combined contribution rates of 16% or more of their pay.

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