Less pension, more work

2004

Today’s young Britons could find themselves having to work until they are 72 because of the decline in the value of their pensions.

A survey by actuary firm Hewitt Bacon & Woodrow found that the average contribution into a money purchase scheme was now 10 per cent of salary.

This is way short of the sum needed to fund the level of retirement pensions many aspire to - the mythical two-thirds of final salary , it said.

Almost two-thirds of UK employers operating final salary schemes have now closed them to new entrants. They have been replaced with defined contribution (or money purchase) pensions, where the employee takes the investment risk rather than the company.

Figures released earlier this week by Close Wealth Management found that those with defined contribution pensions can be left with a pay-out about 30 per cent lower than those with final salary schemes.

Meanwhile firms have slashed the contributions they pay into their employees’ schemes. The average contribution companies paid into defined contribution plans has fallen to 7.81 per cent, nearly half that 13.5 per cent average paid into final salary schemes.

Hewitt's survey of 500 companies found that employees are contributing four per cent of their salary to their pensions, and employers 6 per cent.

And according to Hewitt's survey, very few workers understand the risks such figures pose.

Of 500 employers surveyed nearly 80 per cent said their members did not fully understand that the responsibility of retirement funding had been passed to them.

Chris Cairns of Hewitt, said: "Employees have failed to grasp the implications for their retirement plans and are not setting aside anything like realistic sums.

"Our analysis shows that based on the average level of defined contribution, an employee joining at age 25 will have to work to age 72 to earn a two-thirds pension - and this would be by investing in shares which carry risk."

Hewitt figures are based on 5,000 computer simulations and assume that 10 per cent of salary a year is saved.

The projections show that although there is a one in ten chance of reaching a two-thirds pension by the age of 59, the odds are the same that workers will have to wait until they are 86 to accumulate the same pension pot.