UK- Employees in defined contribution schemes are likely to receive pensions 30% smaller than those in final salary or defined benefit schemes according to research by KPMG Pensions.

The research which covers 74 UK companies suggests almost half of those running DC schemes are making contributions of 5% or less while in a DB scheme, a typical company makes contributions in excess of 10%.

The warning comes as more companies are closing final salary schemes either altogether or to new entrants. Two weeks ago the frozen food retailer Iceland and accounting company Ernst & Young announced they were terminating their DB schemes.

KPMG reports that a third of companies now operate only a final salary scheme. Almost three in ten operate a DC scheme and 36% operate both.

Says David Fairs, a partner in KPMG Pensions: “whilst defined contribution schemes make good business sense for employers, it is vital that employees make much higher levels of contributions and are aware of the risks inherent in not doing so. Many people could face lean retirements otherwise.”

He adds that the level of voluntary pension saving in the UK is low and that unless the average worker does not save more for their retirement, the current changes will add to the burden on the state system.

The research by KPMG shows that almost nine out of ten companies with final salary schemes have seen pensions costs rise in the last few years. Once again the new accounting standard FRS17 was cited as a major concern by almost 40% of companies.

“The volatility of costs and the potential impact of FRS17 mean that the days of the final salary pension scheme look numbered. FRS17 could still have a serious effect on those companies that have moved to defined contribution schemes, because of their historic pensions liabilities. In many cases these liabilities for past benefits for employees and ex employees now approach the value of the sponsoring business itself,” says Fairs.


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