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DC contributions 50% lower than under DB

UK- Average company contribution rates under the increasingly popular defined contribution plans are about half the rate of those for typical defined benefit schemes according to research by the consultant Towers Perrin.

Contributions under DB schemes are, on average, 12% of salary opposed to the norm of 6% for DC schemes. Consequently employees who fail to make any kind of private provision are in for a shock on retirement according to the report.

Towers Perrin surveyed 180 employers employing a total of more than one million people for the report which the consultant says is the largest survey of the DC market.

According to Mark Duke, a partner at Towers Perrin, trustees and employees are some way from a full understanding of the more complicated DC approach to pensions.

“Plan members need more guidance and both employers and trustees need a better understanding of the issues. Our research shows that many plans are storing up trouble for the future,” he says.

Administration failure is seen as the most important risk for DC plan sponsors who also added that poor choice of fund manager and inadequate communication are other significant risks.

More than eight out of ten trustees of DC plans say they need to improve their knowledge of investments and two thirds are unsure how members can be helped make their investment choices.

Says Duke: “DC plans can work well for everyone. But typically, today employees are not equipped to make investment choices, do not full understand the plans they are in and have reason to be mistrustful of the wider savings and advisory industry.”


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