Defined contributions pensions push up cost to employees

Employees
in defined-contribution (DC) pension schemes are having to pay more of their
salary towards their pension than is the case with traditional final salary
schemes, according to consultants Watson Wyatt.

Watson
Wyatt’s Pension Plan Design Survey shows that employees in DC plans are having
to pay up to 8 per cent of salary (after allowing for extra National Insurance
contributions) towards their pensions to get a decent contribution rate,
compared with typical final salary employee contribution rates of less than 5
per cent.

"Without
doubt there are some good DC schemes around," said Colin Singer, a partner
at Watson Wyatt. "But average rates of contribution remain low.
Potentially this is the most worrying aspect of the shift towards DC. The
overall level of pension funding is being reduced and the size of the ‘funding
gap’ is not fully appreciated."

However,
employers are increasingly incentivising those staff willing to make greater
efforts towards their own pension provision. Some 47 per cent of DC pension
schemes in Watson Wyatt’s survey are structured so that the employer
contributes additional ‘matching’ contributions for those employees opting to
make additional contributions themselves. This is up from 37 per cent in Watson
Wyatt’s 2000 Pension Plan Design Survey.

For
those pension schemes with matching contribution structures, the average
minimum employer contribution is 4.3 per cent of salary, with employees
contributing 2.5 per cent – giving a total of 6.8 per cent.

However,
where in addition to the minimum rates, employees opt to pay higher contributions,
on average the potential extra contributions amount to 8.4 per cent (split 3.8
per cent from the employee and 4.6 per cent from the employer), giving an
overall potential contribution rate of 15.2 per cent.

By Ben Willmott

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