Pension contributions too low for decent retirement

Far
too little is being saved in defined contribution pension plans to provide a
decent income in retirement, according to new evidence.  

A
survey by Mercer of more than 450 employer-sponsored schemes – many of them
newly established – shows that employer contributions average just 6 per cent
of salary, marginally down from 6.3 per cent in a previous survey two years
ago.

Average
employee contributions are 3.3 per cent, producing a total contribution of just
9.3 per cent of members’ annual salary.

Tony
Pugh, European partner at Mercer Human Resource Consulting, commented:
"This is what we feared. 

"Contribution
levels are not going up despite the increasing cost of pensions and the need
for people to save more. Many will face the choice of a longer working life or
a smaller retirement income dependent on the State."

He
added: "The main concern must be that employers are switching from final
salary to defined contribution schemes and, at the same time, reducing the
amount of funds they contribute. In the current economic environment, the
amount is often half what they would have to provide for final salary
pensions."

Allowing
for reductions in National Insurance contributions, most employers with final
salary schemes need to contribute at least 12 per cent of members’ salaries to
fund their pension promises. This compares to the average of 6 per cent that
employers currently pay into defined contribution plans.

Mercer
calculates that a 45-year-old man joining a defined contribution plan and
making total contributions of 9.3 per cent of salary, would receive an expected
pension of 14 per cent of his final salary, on retiring at age 65. This
compares to an expected pension under a typical 60ths final salary scheme of 33
per cent of salary.

Mercer’s
survey shows that employers in the banking and finance sector pay the highest
contributions to DC plans – an average of 8.1 per cent.  This compares with the food and drink,
transport and publishing industries, which contribute just 4.4 per cent, 4.6
per cent and 4.9 per cent respectively. 

By Ben Willmott

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