UK - Members of defined contribution (DC) plans could face significant shortfalls in their benefits from the impact of falling investment returns, lower annuity rates and increased life expectancy, says consultant William M Mercer.
The company’s calculations show that pension projections have, on average, halved in the last 10 years.
Its own calculations reveal that a 30-year old entering a DC scheme in 1991, on contributions of 10% of salary, would have had a projected pension of 55% of final salary at age 65. A similar person joining in 2001 could expect to receive an equivalent pension of just 24%.
Pension shortfalls will hit members of defined contribution schemes particularly hard. In times of low investment returns and annuity rates, they are very much on their own, said Jonathan Gainsford, European partner of William M Mercer.
Members of final salary schemes are better protected as they have guaranteed benefits - provided their scheme has enough money in it. It is their employer who normally bears the risks.
Gainsford explained that one of the problems is that currently the expected shortfall in defined contribution pensions is not all that apparent. “This means that many members cannot appreciate how much - or little - pension is building up, he said.
Once revealed, this data could paint quite a different picture from what members, and their scheme managers, would have expected just a few years ago.
Gainsford concluded that, for employers, DC schemes are growing in popularity as the preferred vehicle for occupational pension provision.
“It is all the more important, therefore, that adequate contributions are made to these schemes. In the current environment, 15 to 20% is a more appropriate level.
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