Pension switch helps firms make big saving

Employers operating defined contribution pension schemes, where there is no guarantee of the level of pension at retirement, pay less than half as much in contributions as employers who offer defined benefit schemes, where pensions are linked to final or average salary.

Figures published by the Office for National Statistics last month show that private sector employers operating defined benefit schemes made pensions contributions equivalent to 16.0% of salary in 2005, up from 14.5% in 2004. In contrast, those operating defined contribution schemes paid in only 6.3% on average - slightly up on the 6.0% paid in 2004.

The analysis, published in Pension Trends, indicates that 69% of defined contribution schemes paid in less than 8% of total pay in 2005, compared with only 5% of defined benefit schemes.

The TUC has called for employers operating defined contribution schemes to contribute at least 10% of pay, but only 13% of schemes reach this target.

The number of employees in both types of private sector occupational pension scheme has fallen in recent years, down from 5.1 million in 2000 to 4.4 million in 2005 - 3.7 million in defined benefit and 0.8 million in defined contribution schemes. This is around one-fifth of all those employed in the private sector.

However, in recent years increasing numbers of employers have closed their defined benefit schemes for new employees, offering instead only defined contribution pension schemes.