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Steve Bee is impressed by the speed of the change in pension provision. Long may it continue.

  • By Alex Sullivan
auto-enrolment

Regular IFA Magazine columnist and pensions guru Steve Bee

A Vast Transformation


I was reading through some new stats from the Office for National Statistics (the ONS) recently and I came across a piece of information that literally jumped off the screen at me. It was an update to the section on pension scheme funding and investment and included new data from 2009, the latest year for which complete records are now available.

The fact that hit me right between the eyes was that the value of assets held in UK funded pensions was £1,924 billion in 2009. That, by the way, equates to 138% of GDP, and it really is a big pile of money. It’s nearly two trillion pounds in fact. To put that in perspective, two trillion seconds ago it was about 62,000 B.C. That was really a long time ago, almost 60,000 years before the oldest pyramids were built in Egypt; long, long before what we call human history ever started. If you had a one-pound coin for every second that has ticked by since then (yes, you heard right – every second!) you’d have two trillion pound coins. Two trillion pounds is a lot of money, and it’s great news that we’ve managed to put almost that much aside in our pension pots in just this one relatively small country. Employers and employees in the UK have done a great job.

But it wasn’t just the fact that we have almost two trillion pounds in our funded pensions in the UK that surprised me. The most staggering new piece of information that the ONS update contains is that £1,054 billion of the total (about 55% of it) is in defined benefit schemes. That, of course, indicates that the other 45% is in defined contribution schemes – and it’s that fact that completely gob-smacked me, if I’m being honest.

Thirty years ago, and even twenty years ago, the vast majority of the funded pension assets in the UK were backing defined benefit schemes. Defined contribution schemes didn’t have much money in them back then. But quietly in the background it appears that something of a revolution has been happening in the UK pensions world; bit by bit the steady decline of defined benefit schemes has been matched by a steady increase in defined contribution schemes.

So much so that we are probably already at the point in 2011 when the amount held in defined contribution schemes may for the first time exceed the amount held in defined benefit schemes – we will find out in a couple of years when the 2011 figures finally become available. When that point is reached it will be a historic event, I think – and it would be good if it could happen before defined contribution schemes are given a massive boost by the auto-enrolment laws starting in 2012.

The future of UK pensions is clearly going to be a defined contribution rather than defined benefit one. That will have a profound effect both on the nature of schemes, and on the investments that back them…

 

June 2011