Members of defined contribution (DC) pension plans could face a shock over the level of their benefits on retirement - receiving less than half their expected amount in some cases, as a result of falling investment returns, lower annuity rates and increased life expectancy.

A survey by consultant William M. Mercer shows that pension projections have, on average, halved in the last ten years.

Mercer calculates that a 30 year old entering a DC plan in 1991 and making contributions of 10% of salary would have had a projected pension of 55% of final salary at age 55.
A similar person joining in 2001 could expect to receive just 24%, the consultant says.

Projections for an individual with 15 years of scheme membership and the benefit of strong past investment performance, only fair marginally better.
Based on scheme entry in 1986, Mercer shows that projections at the time would have produced an expected 56% of salary. In 2001, the figure would have dropped to 32%.

Jonathan Gainsford, European partner at Mercer, says pension shortfalls will hit members of DC schemes particularly hard.
“ In times of low investment returns and annuity rates, they are very much on their own.
“ One of the problems is that currently the expected shortfall in defined contribution pensions is not all that apparent. Only a minority of schemes provide members with regular projections of their benefits on retirement. This means that many members cannot appreciate how much – or little – pension is building up.”

Mercer adds that in the current climate, contribution levels need to be raised above the 10% of salary average, to between 15-20%.
“ Many scheme members will need to think seriously about increasing their pension contributions in order to secure a decent income in retirement,” adds Gainsford.