IRELAND - Members of defined contribution schemes in Ireland are receiving a total 10% contribution on average, a level which is likely to prove inadequate to provide a pension, according to a new survey from Mercer HR Consulting.
The 10% total is split, with 4.1% coming from the employee and 5.9% from the employer.
Lower paid employees may find the 10% of contribution adequate, because the lower paid receive a higher proportion of their retirement income from the state pension. However, the pension may not live up to expectations. Ken Mortimer, senior consultant at Mercer commented: ‘This is because typical contribution rates to defined contribution pension schemes vary by industry, with lower paid industries tending to pay lower contribution rates.”
For higher paid employees the contribution is likely to be less than half of what is needed to provide a reasonable level of replacement income after retirement, a fact already revealed by the Society Actuaries.
Many employees with DC plans are unaware of the likely level of their retirement income. Mortimer added: “In a defined contribution plan a member cannot estimate the likely level of their pension without access to a projection tool or a statement showing their expected level of income after retirement. We would encourage employers to make these tools available to employees, so that they have information on the level of AVCs required, well in advance of their retirement.”
Over the past two years, 21% of employers have increased the level of their contribution, with 17% intending to change over the coming two years. Mercer points out that defined contribution schemes, like defined benefit schemes, have suffered from lower bond yields and higher life expectancy, but unlike in DB schemes, sponsors of DC schemes are not obliged to increase contributions through rules on solvency.
Many employers vary their contribution rates to target those employees who value the pension scheme and to encourage more participation. Some 21% match employee contributions up to a certain level, and 26% pay a contribution based on age or service. In 63% of schemes members contributions are fixed, but 24% allow members to choose their contribution rates.
Over the past two years 45% of plans have changed their investment choice, with the same proportion intending to make changes in the coming two years. Mercer welcomes this as a move by trustees to widen member choice of funds and managers: “It is best practice in defined contribution pension schemes to offer a choice of funds to suit the member’s risk profile,” says Mercer.
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