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The cost and value of UK pensions

Published online by Cambridge University Press:  13 June 2017

Paul J. Sweeting Open the ORCID record for Paul J. Sweeting [Opens in a new window]
Paul J. Sweeting*
Affiliation:
School of Mathematics, Statistics and Actuarial Science (SMSAS), University of Kent, Sibson Building, Parkwood Road, Canterbury CT2 7FS, UK
*
*Correspondence to: Paul J. Sweeting, School of Mathematics, Statistics and Actuarial Science (SMSAS), University of Kent, Sibson Building, Parkwood Road, Canterbury, CT2 7FS, UK. Tel: 01227 82 3508; E-mail: [email protected]
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Abstract

Over the last 20 years, the extent of defined benefit provision has declined substantially in the United Kingdom. Whilst most of the focus has been on deficits relating to past benefit accrual, the increasing cost of future benefit accrual is also important. There are two reasons for this. First, the change in the cost of defined benefit accrual represents the difference in the earnings for employees with membership of a defined benefit scheme and those with membership of a defined contribution scheme. Second, the current cost of defined benefit accrual gives an indication of the cost of an adequate pension. As such, it can be compared with levels of contribution to defined contribution schemes to determine whether these are adequate. I therefore look at how the cost of pensions has changed relative to the cost of non-pensions earnings. I also look at the main components of the change in pensions cost – those relating to benefits payable, discount rates and longevity – to analyse their relative importance. I find that the cost of employing a member of defined benefit pension scheme has consistently outpaced the cost of employing someone in a defined contribution arrangement. I also find that the current cost of accrual is significantly higher than the average level of payments to defined contribution schemes.

Keywords

Defined benefitDefined contributionPensionLongevityInterest rates
Type
Papers
Information
Annals of Actuarial Science , Volume 12 , Issue 1 , March 2018 , pp. 49 - 66
Copyright
© Institute and Faculty of Actuaries 2017 

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