Pensions World

Average contributions to UK defined contribution (DC) pension schemes have stagnated as firms face tough market conditions and the challenge of introducing auto-enrolment, according to Mercer research.

Despite growing steadily for the past ten years, employer contributions have, since 2009, frozen at an average of 7.2%. In parallel, pension scheme member contributions have dropped from 4.6% to 4.2% of pay.

Mercer analysed the DC pension offerings of over 300 UK companies, representing some 1.3m employees and £14.3bn in assets under management.

Calculations from Mercer show that from a member’s perspective, volatile market movements, low contribution rates and increasing annuity prices will result in a longer working life or less money in retirement. A 50 year old can currently expect to receive £145 less in monthly retirement income than was projected in 2009 and a person in their thirties is looking at roughly £100 less. The calculations showed that annuity rates have increased by an average of 20% since 2009, hampering members’ probability of obtaining a good retirement income. This dramatic increase has meant that someone with a DC pension pot of £200,000 at age 65 can now only expect to get an annuity [joint life and index linked] of around £5,800 a year, compared to 2009 when they could have got £7,000 a year.

Tony Pugh, European head of DC consulting at Mercer, commented: “With a double-dip recession looming, things are likely to get worse before they get better. We expect however, that rates will trend upwards again over the long term, as employers start to recognise that lowering DC contributions will change the workforce profile as a result of older employees having to work longer. Equally employee pressure to increase contributions is likely to have an impact.” 

Retirement age

A person nearing retirement may need to work for over three years longer to retire on the same income they expected based on conditions back in 2009. A younger person is looking at an even longer delay.

Mercer also surveyed over 1,500 employees. When asked about how the current economic and regulatory environment might impact their retirement prospects, most of the participants were realistic. While 82% would like to retire before the age of 65, over 50% expect to retire after the age of 66. For those closer to retirement (aged 55 to 64), a third (32%) expected to retire between the ages of 66 and 70 and 6% expect to retire after age 71.

“It is encouraging to see how realistic employees are about the future,” said Mr Pugh. “Considerable media attention on pensions has clearly had an impact as many employees now realise that they will have to work beyond the traditional retirement age. Following the removal of the default retirement age, it is inevitable that employers will experience a significant increase in ‘late retirees’.”

He added: “Questions remain as to how well prepared employers are to deal with the change. Additionally, younger employees will have difficulties moving up the career ladder as senior positions remain filled. ”

http://www.mercer.com/