FTSE 350 DB pension contributions outpace DC

FTSE 350 companies paid £4.8bn more into defined benefit (DB) pension schemes than defined contribution (DC) schemes in 2021, although DC contributions are expected to overtake DB within five years, according to analysis from Barnett Waddingham.

The research revealed that FTSE 350 companies paid a total of £14.4bn to DB schemes in 2021, "broadly similar" to the £14.2bn paid in the previous year.

Of this, £9.8bn was used to pay down past service deficits, including a large one-off contribution of £2.5bn paid by Tesco, while the remaining £4.6bn related to DB pension accrual.

DC contributions meanwhile, accounted for only 40 per cent of the total pension cost for these companies, despite having almost tripled from £3.7bn in 2012 to £9.6bn 2021, as a result auto-enrolment legislation introduced.

However, Barnett Waddingham suggested that DB contributions are likely to fall going forward, whilst DC contributions are expected to continue to increase, with DC contributions estimated to overtake DB contributions within five years as a result.

Commenting on the findings, Barnett Waddingham partner, Simon Taylor, highlighted the pension contributions for the FTSE350 companies with DB schemes as a "stark illustration of the enduring intergenerational fairness debate".

"Despite the success of auto-enrolment, it is extraordinary that the promises made to (generally) former employees continues to account for higher expenditure than pension saving for current staff," he continued.

“Current DC members exist in a different financial reality, with a starkly different retirement outlook to current DB members. For companies with both DB and DC schemes, they must consider all of their stakeholders and decide upon the fairest and most prudent allocation of resource moving forwards.

“Crucially, if DC contributions remain at their current low levels, or worse, fall in light of the cost-of-living crisis, companies could find themselves with a cohort of workers who are unable to retire when they should."

In light of this, Taylor urged companies to "lean on data and analytics" to assess the pension arrangements for current employees, how this might develop over time, and consider whether the current offering is appropriate.

"They might also want to think about an overall “pension budget” based on their current total pension spend, and consider what the best use of this capital will be as DB pension costs naturally fall away over time," he said.

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