A changing landscape: 25 years of pensions

Occupational pensions was launched in June 1987. We look back at some of the developments in the past quarter of a century.

On this page:
Type of provision: Defined-benefit to defined-contribution
Table 1: Trend from defined-benefit to defined-contribution active members
Changing attitudes to compulsory membership
Less volatile investment
Use of professional advisers increases
Bad publicity
25 years young
Table 2: Pension landmarks June 1987-2012.

Key points

  • The first issue of Occupational Pensions came out 25 years ago, in June 1987.
  • One of the most well-documented trends is the decline in occupational scheme membership and the move from defined-benefit to defined-contribution provision. The trend is hard to measure accurately because there has also been a trend towards operating group personal pensions, on which data is scarce.
  • Compulsory membership was outlawed in 1988, but the adoption of auto-enrolment could be the forerunner of a return to obligatory membership.
  • Segregated investment has seen a shift out of UK equities into overseas equities, and from equities into bonds, but the future focus may be on DC default fund investment strategies.
  • The past 25 years have seen a number of scandals affecting pensions that have knocked public confidence.
  • Some of the pension landmarks over the past 25 years are set out in the table 2.

The past 25 years during which Occupational Pensions has been published have seen the rapid evolution of work-based pension provision. Change has touched every facet of pensions: administration, benefits, regulatory control, investment, accounting, funding, contributions, legal structure, trusteeship, eligibility, transfers, governance and security. The period has seen progress, as well as frustration and scandals. Below, we pick out a few trends that are relevant today and set out a chronology of some of the landmark developments.

Type of provision: Defined-benefit to defined-contribution

The closure of defined-benefit (DB) schemes to new entrants and more recently to existing members too is very well documented. Figures reproduced in the table below from the Office for National Statistics (ONS) survey, previously run by the Government Actuary's Department (GAD), show that DB scheme membership has gradually declined over a quarter of a century, but fell most sharply between 2006 and 2010. The next survey report is likely to show a fall at least as fast because the recent closures of DB schemes to existing staff will have a more dramatic and immediate impact on numbers than closures to just new members.

Curiously, DB scheme membership has actually been increasing in the public sector. This is despite the reclassification of some employers, such as the Post Office and the BBC, from the public to the private sector. Even without taking into account classification changes, private-sector DB membership fell by more than 40% between 2004 and 2010.

There appear to be a number of factors driving the drift away from DB provision. One of those is the increase in longevity that has made DB schemes appreciably more expensive. Another is the changed accounting practice that means volatile funding levels are reflected in company accounts very quickly, without the ability that previously existed to smooth deficits and disguise this volatility. Yet another is the increasing burden of regulation and the cost of the Pension Protection Fund levy. Arguably, employers are also now much less convinced of the importance of offering a final-salary scheme so as to attract and retain staff and under more pressure to increase profitability.

These ONS figures only relate to occupational schemes. Another trend in recent years has been for employers offering DC arrangements to opt for a group personal pension (GPP) rather than a trust-based plan. The Department for Work and Pensions' latest survey of employers' pension provision shows that 27% of private-sector employees work for an employer offering a GPP to at least some staff. This compares with only 25% of employees whose employer offers any sort of occupational scheme. These numbers do not necessarily reflect membership levels but they are indicative of a trend towards contract-based provision, which is likely to accelerate with the introduction of auto-enrolment. The lack of detailed data on GPPs makes the trends hard to quantify accurately.

Table 1: Trend from defined-benefit to defined-contribution active members

Date Total occupational scheme membership (millions)

Membership of DB schemes (millions)

Membership of occupational DC schemes (millions)

Membership of private-sector occupational schemes (millions)

1987 10.6

10.1

0.5

5.8

1991 10.7

9.8

0.9

6.5

1995 10.3

9.2

1.1

6.2

2000 10.1

9.1

1.0

5.7

2004 9.8

8.6

1.2

4.8

2006 9.2

8.5

1.1

4.0

2008 9.0

8.0

1.0

3.6

2009 8.7

7.7

1.0

3.3

2010 8.3

7.4

1.0

3.0

Note: The data have been presented in slightly different ways from year to year and have required some interpretation. In addition, some changes of methodology mean the findings should be treated with caution and there are some rounding errors. It covers the private and public sector, but not contract-based plans.

Source: Surveys conducted by the Government Actuary's Department 1987-2004 and the successor surveys for 2006-10 produced by the Office for National Statistics.

Changing attitudes to compulsory membership

Just 10 months after Occupational Pensions was first published, it became unlawful to make membership of a pension scheme a condition of employment. There are no figures on compulsory membership in 1987, but four years earlier the GAD survey said that membership was compulsory in the public sector as soon as any eligibility criteria had been met, while in the private sector three-quarters of members were in schemes where membership was obligatory.

Following high numbers of opt-outs and concern about pensioner poverty and about the cost to the state of means-tested benefits, 10 years ago the Pickering report proposed that employers should be able to compel employees to join their scheme. It suggested that the same provision would apply to GPPs and stakeholder schemes provided the employer paid a minimum contribution. Despite support from the TUC, some trade unions opposed this recommendation, as they did not regard it as acceptable for employees to be required to contribute to schemes because of the lack of security for their benefits.

While auto-enrolment is not, of course, compulsion it is a step in that direction. The Pensions Commission, which recommended auto-enrolment, decided against compulsion for three reasons:

  • for some people at some points in their lives, pension saving is not appropriate;
  • it would be seen by many as taxation; and
  • "automatic enrolment goes with the grain of people's attitudes to the appropriate role of the state".

If auto-enrolment does not see very significantly increased levels of participation in pension saving, compulsion is likely to be revisited.

Less volatile investment

We noted two of the long-term asset allocation trends for DB segregated pension funds last month. These are the move out of equities and into bonds, and the trend to place a greater proportion of equity investment overseas. The main driver is volatility reduction.

According to The WM Company (part of State Street), the proportion of segregated funds devoted to equities was 67% in 1987 and this rose to a high point of 81% in 1993. Subsequently, it fell to 44% by the end of 2011. The proportion of assets held in bonds stood at 18% in 1987, fell to 10% in 1993, before rising to 39% at the end of 2011.

Back in 1987, 54% of assets were in UK equities and only 13% in overseas equities. Now 17% are in UK equities and 23% are held overseas, although the picture is confused by the introduction of a category for global equities (including the UK), which has 4% of assets. Nonetheless, the trend is clear.

The rise in popularity of DC schemes is seeing greater emphasis placed on suitable investment vehicles for such schemes. Recent years have seen more innovation in the types of default fund, with the National Employment Savings Trust (Nest) scheme being one that has adopted target date funds. Still more innovation is likely.

Use of professional advisers increases

Our impression is that major employers use professional advisers more than ever, although evidence is sketchy. DB schemes increasingly use third-party administrators for all or part of the day-to-day administration work and for one-off special projects. In addition, DB schemes are more likely to use a third-party custodian and frequently have a number of investment managers. DC schemes have always tended to use insurers to undertake the investment, and frequently part of the administration too. Where the DC scheme is a successor to a DB scheme, employers often use major consultancies.

There have been a number of high-profile mergers or takeovers of major actuarial firms. Clay & Partners became Alexander Clay before being taken over by Aon. Subsequently, Aon joined with Hewitt Associates, which had itself taken over Bacon & Woodrow. Similarly, Towers Perrin and Watson Wyatt, itself formed from a merger, joined to form Towers Watson. This rather suggests that the number of firms is reducing. However, new firms have emerged and grown rapidly, notably Barnett Waddingham and Punter Southall. So the picture is confused.

The number of law firms offering pensions advice has more clearly shrunk, with a number of major firms merging.

Bad publicity

The past 25 years have seen the pensions industry rocked by a series of scandals, in particular:

  • the Maxwell affair;
  • personal pensions mis-selling;
  • employees facing the double jeopardy of losing both their job and their pension when employers became insolvent, before the introduction of the Financial Assistance Scheme and the Pension Protection Fund; and
  • the Equitable Life debacle.

Inevitably, public confidence is knocked by the bad publicity. It was interesting that when Nest was being designed, responses at focus groups showed that people were more confident of a name for the new arrangement that did not include the word "pensions".

More bad publicity will result if employees are automatically enrolled into schemes but it turns out that they would have been no better off than an equivalent person who did not save. Poor returns, although in no sense a scandal, may also lead to bad publicity and lack of confidence in pensions.

One by-product of these scandals is that regulation of pensions has increased. It is a difficult balance to strike. More regulation hopefully safeguards members' pensions and gives members and prospective members confidence that they will receive the benefits promised, yet more regulation adds to costs and administrative headaches. Following a clamour for the Occupational Pensions Regulatory Authority to be replaced by a proactive regulator, the Pensions Regulator was established. Subsequently, some complained that its interventions were unnecessary and burdensome for well-run schemes. It is a no-win situation for the regulator.

25 years young

Occupational Pensions has reported on all of the key developments over the past 25 years. Our approach remains unchanged: to provide accurate, objective, researched-based information, primarily about work-based pension provision, and with examples of practice in named schemes wherever possible. We do not argue for or against particular policies or approaches (aiming to retain strict neutrality), but do point out shortcomings in arguments and practical problems and make an assessment of the usefulness and clarity of published material.

Table 2: Pension landmarks June 1987-2012

June 1987

Occupational Pensions journal launched.

6 April 1988

Membership: compulsory membership of occupational pension schemes becomes unlawful.

1 July 1988

Personal pensions: policies can be sold, and membership can be backdated to 6 April 1987.

1 June 1989

Tax relief: an earnings cap of £60,000 is introduced for new scheme members, effective from this date for existing schemes.

17 May 1990

Barber judgment: the European Court of Justice rules that occupational pension benefits are "pay" under EU law and must therefore be equal for men and women.

2 April 1991

Pensions Ombudsman: office opens, with Michael Platt as the first ombudsman.

5 November 1991

Robert Maxwell is found dead having apparently fallen overboard from his yacht; subsequently, black holes emerge in several Maxwell pension schemes.

4 March 1992

Maxwell report: the first of many reports on the affair is published by the Commons Social Security Committee chaired by Frank Field MP.

9 March 1992

Self-investment: investment in a sponsoring company is restricted by new Regulations.

29 June 1992

Winding up: any deficit in DB scheme when it winds up becomes a debt on the employer.

30 September 1993

Goode report: the Pension Law Review Committee, chaired by Professor Roy Goode and set up in the wake of the Maxwell affair, reports, with proposals that include a minimum solvency standard, member-nominated trustees and a new regulator.

8 December 1993

Personal pension mis-selling: the Securities and Investments Board sets up a committee to review sales of personal pensions and transfers out in the light of evidence that thousands of people have been badly advised to opt out of occupational pensions in favour of a personal pension, or to transfer accrued rights in a DB scheme to a personal pension.

23 June 1994

Maternity leave: members of occupational pension schemes become entitled to accrue pension rights during paid maternity leave.

28 September 1994

Coloroll case: the European Court of Justice gives judgment in six cases, including Coloroll, extending the impact of the Barber judgment on sex equality in pensions.

31 May 1995

Part-timers: new Regulations introduced extending requirements on equal access to pension schemes to part-timers but limiting backdated membership to two years.

19 July 1995

Pensions Act 1995 gains royal assent. The Act introduces the Occupational Pensions Regulatory Authority (the forerunner of the Pensions Regulator), member-nominated trustees, obligatory increases to DB pensions in payment (capped at 5% per annum), a minimum funding requirement for DB schemes, protection for accrued rights, a limited compensation scheme, a requirement for divorce courts to take pensions into account and provisions to equalise state pension age for men and women.

1 July 1996

Divorce: earmarking orders introduced in England and Wales.

6 April 1997

Legislation: many of the provisions in the Pensions Act 1995 effective.

2 July 1997

Tax: Budget announces that, in future, tax credits on UK dividends can no longer be claimed by pension schemes - this was dubbed chancellor Gordon Brown's "pensions raid".

30 June 1999

Annuities: members of defined-contribution (DC) occupational schemes and those with buyout policies can defer taking an annuity and take income drawdown.

20 July 2000

Equitable Life: a House of Lords judgment is given against the insurer concerning its with-profits bonus practices and guaranteed annuity rates; this results in the insurer's closure to new business soon after.

1 December 2000

Divorce: legislation allowing pensions to be shared on divorce effective.

6 March 2001

Investment: Myners report on institutional investment published recommending, in particular, a code of practice.

6 April 2001

Stakeholder plans: members can join stakeholder schemes.

22 June 2001

Company accounting: Financial Reporting Standard 17 introduced and applies to company years ending on or after this date.

1 July 2001

Part-timers: Regulations effective that prevent part-time employees being treated less favourably and backdated membership can be claimed to 1976.

11 July 2002

Pickering report: a government-commissioned report by Alan Pickering proposes that employers should be able to stop providing spouses' pensions and increases to pensions in payment, and make scheme membership compulsory.

1 October 2002

Fixed-term workers: discrimination against such workers becomes unlawful.

6 April 2003

Benefit statements: requirement for statutory money-purchase illustrations effective.

1 October 2003

Cash balance: Barclays becomes the first major employer to introduce a scheme of this type, which shares risk between the company and members.

8 March 2004

Equitable Life: government-commissioned report by Lord Penrose into the fiasco is published.

1 October 2004

Disability discrimination: new requirements affecting pensions effective.

6 April 2005

Compensation: Pension Protection Fund (PPF) established to provide compensation for members of underfunded schemes where the sponsoring employer becomes insolvent on or after this date.

6 April 2005

Pension increases: cap on obligatory pension increases for DB schemes reduced from 5% to 2.5% per annum with effect from this date.

1 September 2005

Compensation: Financial Assistance Scheme established to cover situations where employer became insolvent prior to 6 April 2005. Now provides "assistance" very similar to PPF.

30 November 2005

Commission: the Government's Pensions Commission, led by Lord Adair Turner, recommends that the basic state pension be increased along with the age at which it is paid, that most employees be auto-enrolled into a pension scheme and that a National Pension Savings Scheme (later renamed Nest) is established.

30 December 2005

Funding: scheme-specific funding replaces minimum funding requirement and obligation for DB schemes to provide members with an annual funding statement begins.

6 April 2006

Transfers: leavers with between three and 24 months' service are entitled to a cash transfer.

6 April 2006

Tax simplification: new tax regime introduced under Finance Act 2004 that removes numerous previous limits and replaces them with an annual and a lifetime allowance. Occupational schemes no longer have to offer an additional voluntary contributions arrangement.

1 December 2006

Age discrimination: legislation on age equality in force, although numerous exemptions for pensions.

12 December 2006

White paper: sets out how employers may be exempt from operating personal accounts (now Nest).

5 April 2007

DB closure: Renishaw becomes one of the first companies to close its DB scheme to all future accrual.

25 July 2007

Deregulatory review: report by government-established review recommends a move to principles-based regulation and making it easier to establish risk-sharing schemes (neither of which came about).

16 July 2008

Equitable Life: Parliamentary Ombudsman publishes fourth report on the insurer and recommends the payment of compensation.

3 September 2008

Buyout: Cable & Wireless announces the first £1 billion pensions buyout.

3 October 2008

Investment: revised Myners code is published.

26 November 2008

Auto-enrolment: the Pensions Act 2008, introducing auto-enrolment, receives royal assent.

15 January 2009

Equitable Life: Government asks Sir John Chadwick to advise on basis for payment of compensation.

26 June 2009

Longevity swaps: Babcock announces first swaps deal in relation to an occupational pension scheme.

15 October 2009

Equitable Life: the High Court upholds a judicial review claim challenging the Government's response to the Parliamentary Ombudsman's report and as a result the Government widens the scope of its compensation scheme.

6 April 2010

Pension age: the minimum pension age is increased from 50 to 55.

6 April 2010

State pension age: starts to increase from age 60 for women.

22 June 2010

Budget: new coalition announces that Labour's plans on pensions tax relief for high earners are to be scrapped and proposes a much lower annual allowance instead, that the increase in state pension age to 66 will be accelerated and that the consumer prices index is to be used in future for uprating state and public sector pensions.

20 October 2010

Equitable Life: Government announces it will make compensation payments.

27 October 2010

Auto-enrolment: an independent review set up by the Government recommends that auto-enrolment and the introduction of Nest goes ahead, but proposes some simplifications.

1 December 2010

Disclosure: trustees can now meet their disclosure obligations by electronic means.

1 March 2011

Unisex annuities: the European Court of Justice rules in the Test-Achats case that the use by insurers of gender-based actuarial factors is unlawful. Consequently, unisex annuity rates will be required in future.

10 March 2011

Public services: Lord Hutton publishes the final report of his review of public sector pensions recommending the introduction of a career-average scheme for new and existing members, with pension age increasing in line with state pension age.

23 March 2011

State pensions: the Budget announces that the Government is planning to introduce a simple, flat-rate state pension above the level of the current means-tested guarantee credit. This will probably necessitate ending contracting out.

6 April 2011

Annuities: it is no longer necessary to purchase an annuity with a pension fund by age 75 and any level of income may be drawn down from a fund provided individuals can show they have a guaranteed income of £20,000.

6 April 2011

Tax allowance: the annual allowance for tax-relieved pensions saving is reduced, retrospectively, from £255,000 to £50,000.

6 April 2011

Retirement age: default retirement age of 65 scrapped, but there is a further six-month transitional period that employers can make use of.

16 May 2011

Equitable Life: Government finally sets out how compensation payments will be made.

3 November 2011

Pensions Act 2011 receives royal assent. Statute adds flexibility to the auto-enrolment regime, increases state pension age to 66 in 2020 and allows use of the consumer prices index for pension indexation.

29 November 2011

State pension age: in his autumn statement the Chancellor announced that state pension age would be increased from 66 to 67 by April 2028, eight years earlier than previously planned.

5 April 2012

Contracting out: contracting out of the second-tier state pension on a DC basis ends.

6 April 2012

Tax allowance: the lifetime allowance for tax relieved pensions savings is reduced from £1.8 million to £1.5 million.

June 2012

Occupational Pensions: 25th anniversary issue.