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DC contributions falling well short of securing comfortable income at retirement
The average contribution to a workplace defined contribution (DC) pension scheme falls significantly short of that required to secure a “comfortable” income at retirement according to research commissioned by the Columbia Threadneedle Investments.
According to the research, which was carried out by the Pensions Policy Institute (PPI), the average contribution into a workplace DC scheme is 6% gross salary, with 4% coming from the employer and 2% from the employee. This falls well short of the 11% and 14% that it says employees and employers should be contributing of an employee’s salary, to have a two in three chance of generating an adequate level of income at retirement, and that is only if they start saving at the age of 22.
As DC’s are set to become the prevalent form of pension savings in the UK, the research shows there could be about 14 million contributing to a DC scheme by the year 2030, up from the 11 million today. In addition the median DC pot could grow from £14,100 today to £56,000 in 20 years time owing to the longer period they can benefit from saving.
In aggregate the value of UK DC assets is projected to grow to £554bn by 2030 (in 2015 earnings terms), which is a figure considerably lower than the current industry consensus of £1.7trn (in nominal terms).
Possibly as a result of a lack of advice and the complexity of investment choices available, the research also found that the majority of savers invest in the DC scheme default fund.
Campbell Fleming, CEO, EMEA at Columbia Threadneedle Investments, said: “We partnered with the PPI to encourage a better understanding of UK workplace savings, so that investors, policy makers and the pensions community can make better decisions.
“In our view the emphasis is on both employers and employees to consider increasing joint contribution levels. But it also up to us asset managers and investment solution providers to work with savers, policy makers and trustees to make investment choices simpler and more intuitive in order to encourage engagement with pensions early on.”
In terms of those opting for the default fund, he added: “The default fund option in a pension scheme is not necessarily the best choice for investors. Default funds are often heavily skewed towards equities and therefore carry a higher risk, which may be appropriate in the early stages of savings but not when investors are closer to retirement.”
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