UK - Employees in defined contribution schemes are having to pay more towards their pension than their final salary counterparts.
According to consultant Watson Wyatt's ‘Pension Plan Design Survey’, employees in DC plans are having to pay up to 8% of their salary towards their pensions to get a decent contribution rate, compared with a typical final salary contribution rate of under 5%.
Without doubt there are some good DC schemes around, said Colin Singer, a partner at Watson Wyatt.
But average rates of contribution remain low. Potentially this is the most worrying aspect of the shift towards DC. The overall level of pension funding is being reduced and the size of the funding gap is not fully appreciated.
On the flip side, employers are increasingly incentivising those staff willing to contribute more towards their own pension.
Some 47% of DC schemes surveyed are structured so that the employer contributes additional matching contributions for those employees opting to make additional contributions themselves. This figure compares to 37% in 2000.
For those pension schemes with ‘matching’ structures, the average minimum employer contribution was 4.3% of salary, with employees contributing 2.5% - giving a total of 6.8%.
However, where in addition to the minimum rates, employees opted to pay higher contributions and receive further matched employer contributions, on average the potential extra contributions amounted to 8.4%, giving an overall potential contribution rate of 15.2%.
After allowing for the cost of death-in-service benefits and the benefits arising from S2P or National Insurance rebates, this compares well with the typical contribution rate for a defined benefit plan, added Singer.
But it is important to bear in mind that many employees do not opt to pay the maximum matched contributions.
Watson Wyatt warned that employers need to consider very carefully the ‘matching contribution philosophy’.
In our experience, employers have become more concerned to focus employee benefits costs where they are most appreciated. But it is important that such schemes are well communicated to employees,” Singer explained.
“One can imagine yet another 'misselling' scandal if pension scheme members say they did not realise that theiremployer would pay, say, 2% for every 1% they paid.
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