The Cost and Benefit of UK Defined Benefit Provision

Paul Sweeting

In this paper, I look at the effect of the change in the cost to an employer of providing
a defined benefit (“DB”) 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. I also look at the change in value of an employee’s remuneration
taking into account the value of DB 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. 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 DB pension accrual. The
increase in the value of remuneration to employees has shown a similar pattern.

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