Far too little is being saved in defined contribution pension plans to provide a decent income in r...
Far too little is being saved in defined contribution pension plans to provide a decent income in retirement, accord- ing to research from pension consultants Mercer.
The company has published a survey of over 450 employer-sponsored schemes, many of them newly established, showing that employer contributions average just 6% of salary, marginally down from 6.3% in a previous survey two years ago. Average employee contributions are 3.3%, producing a total contribution of just 9.3% of members' annual salary.
Tony Pugh, European partner at Mercer Human Resource Consulting, said: '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.'
'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% of members' salaries to fund their pension promises, Mercer said. This compares to the average of 6% that employers currently pay into defined contribution plans.
'It's understandable that many employers have cut contributions to reduce the current drain on their finances. Members need to be made aware of the shortfall this creates. In defined contribution plans, individual members have to make up the difference,' Pugh said.
'Up to now, the reduction in pensions has gone largely unnoticed as, so far, only a minority of members have reached retirement age in these schemes. But this is about to change. Under new legislation next year, scheme members will receive benefit projections that will reveal the true extent of the shortfall.'
The requirement for plans to provide projected pension figures is being introduced in April 2003.
In a sample case study, Mercer calculates that a 45-year-old man joining a defined contribution plan and making total contributions of 9.3% of salary, would receive an expected pension of 14% of his final salary, on retiring at the age of 65. This compares with an expected pension under a typical 60ths final salary scheme of 33% of salary.
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