As more pension funds move from a defined benefit (DB) to a defined contribution (DC) basis, millions of employees are unaware of the retirement funding risk, claims Alliance Trust Savings (ATS).
With 57% of private sector final salary pension schemes now closed to new employees, and hundreds of schemes closed down over recent years, ATS suggests millions of employees are in urgent need of pension guidance to avoid retirement poverty.
It claims the element of risk has shifted from the employer to the individual employee, who very often knows very little about how a pension scheme works, and warns DC schemes must adapt to make them understandable to the average person.
In a final salary scheme, the employer bears the risk of investment return up to retirement, any expenses and inflation after retirment up to a cap, usually of 5% per year, but in a DC scheme the individual member will be responsible instead.
Hyman Wolanski, head of pensions at ATS, says over the past few years the onus for providing the nation’s old age has shifted firmly from the employer to the individual.
But he adds: “We’re deeply concerned that millions of people are not yet equipped to deal properly with this new responsibility, and that not enough is being done to alert people to the risks associated with retirement saving.”
Wolanski points out there is a lot of work to be done in making mass market DC schemes fit for purpose, as they need to evolve so scheme members can interpret the options open to them and understand the specific risks.
He says: “At the most basic level this means greater financial education, and investment options that are more intelligible and relevant to those with little or no understanding of the pension market.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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