UK - Members of defined contribution schemes could end up with a "meagre" pension if they do not keep up healthy levels of contributions, according to KPMG Pensions.
According to KPMG, members in low funded DC schemes could expect a 30% lower retirement income than in a typical final salary scheme. KPMG warns of the need for employees to keep up pension contribution levels following a raft of final salary scheme closures.
KPMG found that 43% of companies running DC pension plans were making contributions of 5% or less, while in a typical final salary scheme employer contributions were 10% or more. DC schemes then tended to have combined contributions of 10% or less.
Commenting on the results, David Fairs, KPMG pensions partner, said: More and more companies are closing down their final salary schemes, some even to existing members, and switching to defined contribution. Whilst defined contribution schemes make good business sense for employers, it is vital that employees make much higher levels of contributions and are aware of the risks inherent in not doing so.
“Many people could face lean retirements otherwise. The level of voluntary pension saving in the UK is not high and unless employees save more for their retirement, the changes we are seeing will potentially increase the burden on state retirement provision.
KPMG's research found that 88% of companies with final salary schemes had seen their pension costs rise in recent years; two thirds of them expected those costs to keep on rising unless they took decisive action.
The introduction of the FRS17 accounting standard was another major concern, cited by almost 40% of respondents.
Pensions are now costing business 15% or more of payroll in many cases, and costs year on year have become more volatile. Companies are struggling to manage these financial risks within their business plans, added Fairs.
“The volatility of costs and the potential impact of FRS17 mean that the days of the final salary pension scheme look numbered.”
But Fairs also argued that FRS17 could still have a serious effect on those companies that have moved to DC schemes, because of their historic pension liabilities. In many cases, these liabilities now approached the value of the sponsoring business itself.
The study found that 34% of companies now operate a final salary pension scheme only; 28% operate a defined contribution scheme, while 36% operate both. Around 44% of final salary schemes were already closed to new entrants.
*KPMG's survey was conducted amongst 74 UK companies. A breakdown of respondents included 64% of companies employing under 1,000 staff; 15% employed 1,000-5,000; 21% employed over 5,000; 44% of companies had pension schemes with assets of over £25m.
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