Pensions double whammy for British workers

Sep 13 2007 by Nic Paton Print This Article

Not only do most British workers no longer have the luxury of a final-salary pension, but bad management of the defined contribution pensions that have replaced them could leave them 70 per cent worse off in retirement.

The past few years has seen a mass exodus by employers from expensive final-salary pension plans, with many closing them to new or even existing members.

As a result, two thirds of workers joining an occupational pension now only have the option of signing up to a defined contribution scheme.

But many firms have been so busy wrestling with their defined benefit final-salary schemes that they have failed to devote enough time and attention to their DC schemes, according to HR consultancy Hewitt Associates.

The result is many schemes are being poorly managed and failing to use all the financial mechanisms available to increase their value.

Employees were also at fault for not taking more interest in how their pension was doing and failing to make sure it was being managed proactively, said Hewitt.

Hewitt's study of 106 DC schemes, covering more than 1.1 million members between them, found many were not run nearly as efficiently as they could be.

In fact many employers had failed to introduce simple mechanisms that could considerably increase the retirement income of employees paying into the plans.

For example, a significant number did not use salary sacrifice to raise the value of the pension.

This is where employees give up part of their salary or bonus in exchange for an employer contribution of an identical value.

Others did not use matched contributions, where the employer matches what the employees chooses to contribute.

Many failed to escalate contributions, where the employee initially agrees to contribute a lower amount but the level of payment automatically increases over time.

There was also a lack of active management of policies, meaning they were less likely to outperform a particular index or market.

And others failed to promote an employee's legal right to purchase annuities at retirement on the open market, a mechanism that can potentially raise their retirement income significantly.

In all, employees who were able to use all these mechanisms could increase their future retirement income by as much as 70 per cent compared with those who had not, said Hewitt.

Chris Cairns, Hewitt Associates DC specialist, said: "Employers, trustees and members could all be doing more to improve efficiency and value for money, but many sponsors and trustees are being forced to make managing their defined benefit scheme risk a priority over maximising future benefits in their DC scheme.

"Last year's DC survey found that, despite the best intentions, DC schemes had not sufficiently persuaded employees to take control of their retirement savings, and that trustees were still making most of the decisions," he added.

"The 2007 results show that employers, trustees and members now need to take joint responsibility for increasing the efficiency of their DC arrangements, and to develop proactively a more sophisticated way of increasing future benefits," he concluded.

Unsurprisingly given the lack of alternative, there had been a massive increase in take-up of defined contribution schemes since Hewitt started its research back in 2004.

Yet just under half of all employees were still choosing not to join their defined contribution scheme, effectively turning down free money from their employer, it added.