88% of Defined Benefit (DB) pension schemes that closed have selected a Defined Contribution (DC) arrangement as a replacement scheme, with the balance made up of PRSAs and Hybrid structures, according to a new survey by the Irish Association of Pension Funds. Of the new schemes established, the maximum employer contribution rate exceeds 10% in half of the schemes, with 8% of employers contributing greater than 15% of salary. In 44% of new DC structures, the employer matches the employee’s contribution, usually up to maximum of 10%-15% of salary. In total, 86% of schemes paid more than the traditional, typical contribution rate of 5%.
These were the findings of the IAPF Defined Benefit Survey 2018, which examined 65 companies comprising of over 60,000 members, with pension savings in excess of €20bn.
Other findings included:
- 20% of companies surveyed still have a DB plan in place which is open to new entrants and future accrual of benefits
- Approximately 74% of companies have legacy DB arrangements in place which are closed to new members, with half of these being closed to future accrual
- 39% of closed DB schemes have removed future service accrual for existing active members
Speaking of the findings, Jerry Moriarty, CEO of the IAPF,
“While the migration from the much-coveted defined benefit scheme over the last few years has been difficult for many employees, our survey has revealed that those employers who have replaced the DB pension structure with a DC structure are making relatively generous contributions into those schemes on behalf of employees”.
Contribution Structures in Replacement DC Schemes
The survey also pointed toward “matching” as being the most common employer/ employee contribution structure (44%). Matching is where the employer will increase contributions to the scheme where the employee agrees to increase theirs. The employer will usually pay up to a max percentage of salary, typically 10% -15%, with the employee contribution usually being less than that.
Most other employers (38%) have committed to contribute a level/fixed rate contribution, typically somewhere between 5%-12%.
The balance of the DC replacement plans operate either age-related, grade-related or service-related contribution structures.
Employers “future-proofing” for employees
Mr. Moriarty spoke of the positivity reflected in the survey,
“Many of the transitions from DB to DC are now complete. It would appear that many employers are prepared to put adequate contributions in place for their employees. Traditionally DB schemes would have provided greater certainty of income in retirement for employees. However, this changed as the schemes got more expensive and became difficult for many employers to sustain. A greater focus on the contributions being paid to DC schemes should increase the chances of those members enjoying an adequate income in retirement.”
Over 63% of schemes surveyed have de-risked their investment strategy, effectively future proofing benefit for their members.
Mr. Moriarty added,
“While a default investment strategy is in place for 96% of DC schemes in the run up to retirement, the options for employees at retirement have broadened. There is a clear trend of a move away from the simple traditional annuity and/or cash strategy at retirement, with funds now offering a variety of different member-specific glidepaths at retirement.”