This Toolkit is for reps, activists and organising staff whose workplace offers a Defined Contribution (DC) pension scheme or is looking to introduce one. It attempts to alert you to key issues with a focus on how your scheme compares against others and perhaps more importantly, what can be done to make it better!

What is a Defined Contribution (DC) pension scheme?

  • This is a scheme where a member builds up a pot of money for the purpose of providing an income and/or lump sum on their retirement. The size of the pot depends upon the amount both the member and employer pay in, the performance of the fund and the charges to be taken from it.
  • The funds can be accessed from 55 and the member has a variety of options on what to do with it.
  • These include taking 25% of the value as a tax-free cash sum and using the remainder to buy a pension (known as purchasing an annuity), taking the whole lot as cash (although only 25% will be tax-free) and income drawdown wherea series of withdrawals are made whilst deferring or perhaps not even buying a pension at all.

What is UNISON’s policy on DC pension schemes?

  • UNISON prefers Defined Benefit (DB) schemes as there’s plenty of evidence to show that DC schemestypically pay out less income on retirement than good quality DB schemes, such as those offered within public services. A DB scheme is one where a regular monthly income is paid in retirement and the pension amount is calculated based on a combination of salary, length of service and the scheme’s rate of accrual formula. Broadly speaking the greater one’s salary and length of service the bigger the pension in retirement. Essentially DB schemes provide a predictable and guaranteed income for life.
  • We recognise however that good quality DC schemes still have a vital role to play in pension saving and with the likelihood of such schemes only increasing in number it’s vital that you understand how such schemes work and how your employer offering compares against alternative pension schemes. This may help you to campaign for improvements to your scheme and aid member recruitment in the process.

UNISON’s 5 point chart for a “reasonable” DC scheme

  1. MINIMUM 10% EMPLOYER CONTRIBUTIONS

1.1Generally total contributions to DC schemes areinadequate when compared against typical DB schemes

The following table shows the average contribution rates for private sector occupational pension schemes for both DC and DB schemes as reported in the Occupational Pension Schemes Survey UK 2015:

Employer / Employee
Defined Contribution / 2.5% / 1.5%
Defined Benefit / 16.2% / 5%

These figures are despite 19% of all UK employers contributing 10% or more to employees pension pots[1]. Suggesting that a very large number of employers (and employees) are simply making statutory minimum contributions.

1.2How much is an adequate contribution?

Although contribution levels do not solely determine levels of retirement income, since there are other driving factors such as investment returns and mortality trends, the average contribution figures specified above do indicate that there is a huge gap in the amount of money, relative to salary, currently being paid into DC schemes from both employees and employers compared with DB schemes.

To see the extent of this the four tables below show estimates of the contribution levels required for each year of service (as a % of salary) to target good quality final salary benefits in a DC scheme. These show the required contribution level on entry to secure benefits on retirement (age 65) broadly equivalent to a 1/60thaccrual rate final salary scheme.[2]

The tables also show how many years it would take for the DC pot to run out if a pension was not purchased at retirement as well as showing what a steady contribution rate of 15% for every year up to retirement would compare accrual rate wise in a final salary scheme world.

Each table is different depending on whether the pension at retirement increases in line with inflation or not and/or whether a spouses pension is paid on death. You can see that the more “add-ons” there are, the more expensive the pension and the greater the required contribution.

Table 1 - No pension increases, no spouses pension
Member age at entry / Contribution (% of Salary) / Accrual rate / Years until pot runs out / Contribution (% of Salary) / Accrual rate (15% contributions) / Years until pot runs out (15% contributions)
25 / 16.86% / 1/60 / 21.4 / 15% / 1/67 / 19.0
30 / 18.28% / 1/60 / 21.0 / 15% / 1/73 / 17.2
35 / 19.77% / 1/60 / 20.6 / 15% / 1/79 / 15.6
40 / 21.33% / 1/60 / 20.2 / 15% / 1/85 / 14.2
45 / 22.95% / 1/60 / 19.8 / 15% / 1/92 / 13.0
50 / 24.66% / 1/60 / 19.5 / 15% / 1/99 / 11.8
55 / 26.47% / 1/60 / 19.1 / 15% / 1/106 / 10.8
Table 2 - With pension increases, no spouses pension
Member age at entry / Contribution (% of Salary) / Accrual rate / Years until pot runs out / Contribution (% of Salary) / Accrual rate (15% contributions) / Years until pot runs out (15% contributions)
25 / 28.24% / 1/60 / 20.4 / 15% / 1/113 / 13.9
30 / 30.34% / 1/60 / 20.1 / 15% / 1/121 / 12.9
35 / 32.51% / 1/60 / 19.8 / 15% / 1/130 / 12.0
40 / 34.74% / 1/60 / 19.5 / 15% / 1/139 / 11.2
45 / 37.04% / 1/60 / 19.2 / 15% / 1/148 / 10.4
50 / 39.43% / 1/60 / 18.9 / 15% / 1/158 / 9.7
55 / 41.93% / 1/60 / 18.6 / 15% / 1/168 / 9.0
Table 3 - No pension increases, with spouses pension
Member age at entry / Contribution (% of Salary) / Accrual rate / Years until pot runs out / Contribution (% of Salary) / Accrual rate (15% contributions) / Years until pot runs out (15% contributions)
25 / 19.66% / 1/60 / 24.9 / 15% / 1/79 / 19.0
30 / 21.38% / 1/60 / 24.6 / 15% / 1/86 / 17.2
35 / 23.21% / 1/60 / 24.2 / 15% / 1/93 / 15.6
40 / 25.12% / 1/60 / 23.8 / 15% / 1/100 / 14.2
45 / 27.12% / 1/60 / 23.4 / 15% / 1/108 / 13.0
50 / 29.22% / 1/60 / 23.1 / 15% / 1/117 / 11.8
55 / 31.43% / 1/60 / 22.7 / 15% / 1/126 / 10.8
Table 4 - With pension increases, with spouses pension
Member age at entry / Contribution (% of Salary) / Accrual rate / Years until pot runs out / Contribution (% of Salary) / Accrual rate (15% contributions) / Years until pot runs out (15% contributions)
25 / 35.75% / 1/60 / 22.7 / 15% / 1/143 / 13.9
30 / 38.53% / 1/60 / 22.4 / 15% / 1/154 / 12.9
35 / 41.43% / 1/60 / 22.2 / 15% / 1/166 / 12.0
40 / 44.42% / 1/60 / 22.0 / 15% / 1/178 / 11.2
45 / 47.50% / 1/60 / 21.7 / 15% / 1/190 / 10.4
50 / 50.69% / 1/60 / 21.5 / 15% / 1/203 / 9.7
55 / 54.02% / 1/60 / 21.2 / 15% / 1/216 / 9.0

1.3Current contribution rates are nowhere near sufficient

Although pension needs vary substantially between individuals the above contribution rates suggest that current levels of employer and employee contributions are rarely sufficient to provide adequate inflation linked pensions in retirement that provide security for dependants in the event of death.

1.4The contribution level standard of the PALSA Pensions Quality Mark needs to increase

DC schemes that satisfy three basic criteria set down by the Pensions and Lifetime Savings Association (PALSA) can apply for a Pensions Quality Mark (PQM) that in PALSA’s view would constitute the sponsoring employer as providing a “good quality DC pension scheme”.

One of these standards concerns contribution levels. To qualify for a PQM there must be minimum contribution levels of at least 10%, with a minimum employer contribution of 6%. For the PQM Plus, overall contribution rates must be at least 15% with an employer minimum contribution rate of 10% or more.

  1. FULLY TRANSPARENT CHARGES AND THE AMC LESS THAN 0.75%

2.1Pension fund charges at face value seem relatively small and insignificant but this is not the case. In December 2008 one of the most senior figures in the fund management industry, David Pitt-Watson admitted in a submission to the Royal Society for the Encouragement of the Arts, Manufactures and Commerce (RSA) that up to 40 per cent of private-sector pension pots are swallowed up in fees.

2.2The RSA called for a sharp reduction in annual fees from the 1.5% it said was typically payable in Britain to the 0.5% charged in Sweden and the Netherlands.

2.3 Mr Pitt-Watson is quoted in the report saying: “A pension lasts 50 years. So an average pound invested in the pension is there for 25 years; 1.5% is paid in fees on the balance of the fund every year; 25 times 1.5% is 37.5%, or approximately 40%.” He told The Times: “Just do the maths and it comes to about 40%”.

2.4Currently qualifying workplace pension schemes for auto-enrolment purposes cannot levy a charge exceeding 0.75%, excluding transaction costs. Charging structures that include Active Member Discounts (AMD’s) and commissions must come within the 0.75% cap. Furthermore, no qualifying scheme can contain member-borne commission payments to an adviser.

2.5 Furthermore, the Financial Conduct Authority (FCA) has consulted on introducing new rules and guidance aimed at improving the disclosure of transaction costs in the DC workplace pensions market. This aims to standardise the disclosure of the transaction costs incurred by pension investments.

Currently, independent governance committees (IGCs) and trustees are required to request and report on transaction costs as far as they are able. The draft rules if implemented would place a matching duty on asset managers to provide full disclosure of these costs in a standardised form.

This should help savers to better understand whether they are getting value for money from their pension scheme/provider.

  1. SECURITY FOR YOUR DEPENDANTS AND PROTECTION IN THE EVENT OF ILL-HEALTH

3.1In typical DC arrangements these protections usually take the form of separate insurance contracts between the employer and insurance company.

3.2 We would certainly expect a reasonable DC scheme to provide survivors protection (and particularly a death-in-service lump sum payment) as well as protection in the event of ill-health, perhaps through a suitable Permanent Health Insurance policy or Income Protection Policy.

3.3For members in DB schemes that are being closed and replaced with DC provision, we would expect the level of protection to be broadly equivalent to that applicable in the DB scheme.

3.4The cost of insuring these benefits should be met by the employer in addition to the contributions outlined in the earlier table. These costs are rarely excessive.

  1. EMPLOYER SPONSORED INDEPENDENT FINANCIAL ADVICE AND FULL PENSION FLEXIBILITY

4.1Members of DC pension schemes have a number of decisions to make with perhaps the most common one being what investment fund or funds to invest their money in. Research shows that the majority of savers simply choose the default fund offered by their provider – often through inertia.

4.2 Savers rarely review their choice of fund/funds and hence often have little idea of how these are performing and whether there may be more appropriate choices available to them.

4.3The availability of independent financial advice is essential for savers to understand their options and to be given specific advice on what is likely to represent their best option.

4.4The government recognises this and has accordingly increased the tax-free limit for employers wishing to pay for independent financial advice for their staff from £150 to £500.

4.5It is therefore essential that we encourage as many employers as possible to utilise this tax incentive as ultimately helping their employees to make better pension and investment decisions will increase their engagement.

4.6It’s also important to ensure that any independent financial adviser appointed is fully regulated by the Financial Conduct Authority and specialises in pension’s advice.

4.7DC savers are allowed to take money from their pension pot tax-free in order to pay for independent financial advice. £500 can be withdrawn once a year and up to three times in total.

  1. COUNTING ALL SALARY AS PENSIONABLE – NOT JUST BASIC SALARY

5.1Punter Southall’s Trends in the DC Pensions Market (2015) survey revealed that 75% of employers use basic salary as their definition of pensionable earnings with a further 10% using the even less generous definition of “qualifying earnings” as defined within the automatic enrolment legislation.

5.2This is hard to understand given that many of us will often receive shift pay, overtime, bonuses, commission, location allowance etc in addition to basic pay so why should this not count as pensionable?

5.3If for example you are earning a basic salary of £25,000 a year and typically earn overtime of a further £8,000 and an annual bonus of £2,000 you would lose out on pension contribution on £10,000 of your overall pay if the pensionable pay definition was restricted to basic salary only. Assuming an employer contribution of 10% and a member contribution of 5% this would result in £1,500 a year (£1,000 employer, £500 employee) not being invested in your pension that could be. Imagine this loss every year over a long period of time! A loss which would increase further as salary increases!

The purpose of this Toolkit

The above benchmarks are prerequisites of what we would expect to see from a DC pension scheme for it to be considered anywhere near comparable to the many good quality final salary and career average pension benefits offered to many of our members .

You should also note that if you are in or offered access to a DC scheme that does not satisfy the above standards, this does not mean you should leave or not join it!! Any employer sponsored pension arrangement is good in the sense that you are obtaining an employer contribution that you would not otherwise get plus you qualify for income tax relief on your pension contributions and in many cases have life cover protection.

Activists and member representatives should use this benchmark paper in negotiations where the employer wishes to implement a DC pension scheme or indeed as a source for looking to improve the terms of current pension provision.

Are you confident that your DC pension scheme will provide you with adequate pension benefits in retirement? If not, take action and campaign for improvements. Dignity and financial security in retirement should be a basic expectation, not a myth.

What can you do?

  • Benchmark any DC pension scheme you are currently offered or are offered in the future against this paper and PALSA’s PQM Plus standard.
  • If it falls short, campaign for improvements
  • Make your activists/representatives aware if your pension scheme is falling behind others within both your industry and others
  • Spread the word that members bear all of the risk in DC schemesand will continually need to review their fund value and overall offering to ensure their retirement aspirations are achieved

Contact: Alan Fox, National Pensions Officer, UNISON,

[1] Punter Southall “Trends in the DC Pensions Market (2015) Survey

[2] First Actuarial report on contribution Adequacy