DC shocks ahead in UK
Contributions to UK defined contribution (DC) plans are inadequate to provide acceptable income levels in retirement, according to a survey by consultants William M Mercer.
Despite marginal increases in the last two years, UK scheme members, with an average total contribution level of 9.75%, will be “unpleasantly surprised” when given details of future benefits, according to the survey.
“Many people will be blissfully ignorant of the level of benefits they are going to get.
“Members need to be given a clear indication of their likely pension and, where this doesn’t meet their expectations, encouraged to save more,” says Jonathan Gainsford, European partner at William M Mercer.
“On average, total contribution levels for employers and employees are less than 10% of pay. A figure of 15–20% would be more realistic to secure adequate pensions, especially in the current environment,” he adds.
The survey also reveals that two thirds of the surveyed companies do not automatically provide projections of members’ retirement benefits.
Expected new regulations will require companies to provide these projections, at least, on an annual basis from next April, says Mercer.
And less than 1% of the companies surveyed give access to personal fund information over the internet or offer the possibility of changing contribution levels or investment options, according to the consultant.
Overall, just 15% of the surveyed firms provided general scheme information through the internet.
“Twenty-four hour access to members’ information, with transactional facilities, is a goal that all schemes should ultimately be aiming for,” says Gainsford.
The survey also reveals that most companies now outsource the administration of their DC schemes – with only 6% of schemes currently running their plans internally, compared to 20% in 1998.
Today, 55% of the schemes are run by third-party administrators, 34% by insurance companies and 5% by investment managers.
Lifestyle funds have grown in popularity in the last few years, with 55% of schemes now offering them, usually as a default investment option, the study says.
It also shows that the lifestyle fund switching period from equity to bonds, prior to retirement, is still relatively long (10 years or longer) in 30% of the schemes.
“The general consensus now is that five years is adequate – any longer, and members will be paying too much for the added protection offered,” Gainsford notes.
The survey covers 288 companies, mainly clients of William M Mercer, of which 118 have fewer than 250 employees, 76 have between 251 and 1,000 in staff and the remainder have more than 1,000 workers.