A 35-year-old joining a defined contribution (DC) pension scheme today could have to contribute more than 10 times the annual contributions of a colleague in a defined benefit (DB) pension scheme to build an equivalent pension at retirement, according to research by Pension Corporation.
The research found that this would equate to a contribution each year of 55% of gross salary for a DC scheme member, compared to the average 5.1% annual contribution rate of a DB scheme member.
After 30 years of these accrual rates, combined with employer contributions, the DB scheme member might have built up an index-linked pension of 50% of final pay, or £13,000 a year for someone retiring in 2011 on national average earnings.
An individual with a DC pension scheme would require a pot of approximately 17 times final pay (£440,000 in 2011, for someone retiring with national average earnings) to secure this level of pension.
David Collinson, co-head of business origination at Pension Corporation, said: “Leaving aside the far more generous employer contribution rates, the individual in the DB pension scheme benefits hugely from economies of scale in everything from pension administration to asset management fees.”
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