Pensions: too little, too late

Nov 13 2002 by Brian Amble Print This Article

A large number of UK employees are facing an uncomfortable future dependent on the State pension unless they start increasing their current level of contributions, claims new research from Mercer Human Resource Consulting.

The study of employee contributions in 450 defined benefit employer-sponsored pension schemes found that workers pay on average just 3.3 per cent towards their retirement.

At a time when many employees are worried about their future pensions, employer contributions have fallen from last year’s survey by 0.3 per cent to six per cent, making an average contribution of just 9.3 per cent of scheme members’ annual salary.

Tony Pugh, European partner at Mercer HR, warned that unless these figures rise soon many employees can look forward to a retirement reliant on a State pension:

”This is what we feared. Contribution levels are not going up despite the increasing cost of pensions and the need for people to save more.

”Many will face the choice of a longer working life or a smaller retirement income dependent on the State,’ he said.

In a speech earlier this month, Tony Blair admitted that there are "serious problems" with the UK pension system.

"The issue is how we enable people to save more for themselves, recognising that if they want a decent income in retirement they are going to have to make provision for themselves, because there will be a limit to what the state can do," the Prime Minister said.

According to Pugh, employers are switching from final salary to defined contribution schemes while at the same time reducing the amount they pay into schemes: “…the amount is often half what they would have to provide for final salary pensions,” he said.

Allowing for reductions in National Insurance (NI) contributions, employers should be paying double the current six per cent figure, says Pugh, a move that will become apparent next year when scheme members are able to receive benefit projections:

”Under new legislation effective from April 203, scheme members will receive benefit projections that will reveal the true extent of the shortfall.

”In a sample case study, Mercer calculates that a 45-year-old man joining a defined contribution plan and making total contributions of 9.3 per cent of salary, would receive an expected pension of 14 per cent of his final salary, on retiring at age 65,” he said.

Mercer’s survey shows that employers in the banking and finance sector pay the highest contributions to Defined Contribution plans - an average of 8.1 per cent - compared with the food and drink, transport and publishing industries which contribute just 4.4 per cent, 4.6 per cent and 4.9 per cent respectively.