There has been a rise of more than 30% in the cost of defined benefit pension schemes for employers since 1995, new research from a pensions expert at the University shows.
Paul Sweeting, Professor of Actuarial Science at the University’s School of Mathematics, Statistics and Actuarial Science, has concluded that the increase in costs ‘suggests that defined benefit pension schemes are becoming so unaffordable that their future is more precarious than ever’.
Professor Sweeting’s research, entitled The cost (and value) of Defined Benefit Pension Schemes, is published as a discussion paper by the Pensions Institute.
In the paper, Professor Sweeting shows that 90% of the rise in defined benefit pension scheme costs is due to the fall in interest rates, with 20% due to people living longer. This is offset by a 10% reduction in benefits caused by the move from linking pensions to the Retail Price Index to the Consumer Price Index.
The research highlights that employers can compare the cost of employment (by adding pension costs to earnings, including National Insurance contributions) for an employee in a defined benefit scheme and a defined contribution scheme.
The analysis shows that the difference in the total cost between the two types of pension scheme has been some 1.1% of earnings per annum from March 1995 to March 2015.
When considered from an employee’s point of view (after deduction of National Insurance Contributions and Income Tax), the difference in change in the value of a defined benefit scheme relative to a defined contribution arrangement is similar – around 1.0% of earnings per annum.