The cost and value of UK defined benefit pension provision

Paul Sweeting

Journal of Pension Economics and Finance, 2008, vol. 7, issue 1, 3-36

Abstract: The purposes of this paper are to consider the effect on remuneration of defined benefit pension accrual and the factors that have resulted in changes to the cost and value of this accrual. In this paper, I look at the effect of the change in the cost to an employer of providing a defined benefit pension on the overall cost of remunerating an employee and compare that with the cost of remunerating an employee with no such pension benefits. I allow for the additional cost to the employer of national insurance contributions (‘NICs’). I also look at the change in value of an employee's remuneration, taking into account the value of defined benefit pension accrual and compare this with the change in remuneration for an employee with no such benefits. Here, I allow for employee national insurance contributions and income tax. These assessments look at the cost and value of pension accrual rather than any surplus or deficit relating to previously accrued pension entitlements. I find that costs of employment have risen significantly more for members of defined benefit pension schemes compared with other employees, and that this has largely been as a result of falling long-term interest rates and their effect on the cost of defined benefit pension accrual. The increase in the value of remuneration to employees has shown a similar pattern.

Date: 2008
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