State pension pays better income than DC – Mercer

UK - Most employees will get better retirement benefits through their State pension than their with their company's defined contribution scheme, research from consultants Mercer indicates.

A study of 400 UK organisations found average contribution levels are too low to support employees are retirement and assets are not being invested to their full returns potential, yet many employees believe their employers' money purchase plans will provide more at retirement than State benefits.

Mercer found overall contribution rates are up since 2002 from 9.5% to 10.4%, two-thirds of which comes from employers' 6.8% contribution alongside 3.6% from the staff member.

However,  over half of employees (52%) think this is enough to give them a pension of more than 50% of their pay on retirement , according to an earlier work and savings study by Mercer.

"Total contributions, while slightly up, still fall short of supporting decent pensions for the majority of people," said Tony Pugh, UK head of defined contribution pensions services at Mercer.

"At the current rate, most employees will get more pension through State benefits than their occupational plan, which may come as a surprise to many. The problem is more acute the higher an individual's pay, and the older they are on joining the plan," he added.

Mercer believes one solution might be to encourage more individuals to use salary sacrifice along with automatic scheme entry requiring member contributions.

However,  this would solve the problems entirely as Mercer also found the vast choice of funds offered, along with lack of knowledge about where their assets should be invested, means 90% of employees end up in the default fund.

Additional work may therefore be needed from trustees to ensure a company pension scheme's default fund meets the needs of the wide variety of employees along with a simplified range of investment choices which better fit a ‘core' satellites strategy, suggests Pugh.

"Making sure that the design of the default fund option is ‘right' for as many members as possible is essential. With members picking up one-third of the cost of their pension, and carrying 100% of the risk, employers and trustees must keep an eye on fund selection and proactively make changes when investments fail to deliver," added Pugh.

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