75% of DC pension savers will retire on inadequate income

Jon Hatchett

Post-Brexit, the proportion of savers into a defined contribution (DC) pension scheme who will retire on an inadequate income has risen to 75% from 66%, according to research by Hymans Robertson.

Its analysis of data of 500,000 savers on the organisation’s Guided Outcomes platform also found that the cost of providing a defined benefit (DB) pension scheme has risen to 50% of pay.

Overall, the UK’s DB pension deficit now stands at £1 trillion, with individuals at risk of losing a significant portion of their benefits if their pension falls into the Pension Protection Fund (PPF), with deficits up by over £250 billion.

Jon Hatchett (pictured), head of corporate consulting at Hymans Robertson, said: “Post-Brexit and the Bank of England’s policy response to economic uncertainty caused by the UK’s decision to leave the EU, the cost of providing a DB scheme has risen to 50% of pay. This is clearly unsustainable for the majority of employers.

“Unsurprisingly, we’re likely to see the last remaining open private sector schemes close and a number of high-profile employers have indicated in recent weeks this is a path they’ll be forced down.

“Back in March 2015 there were 11m people with a DB scheme, but only 1.75m were still accruing benefits. Since then we’ve seen a large number of closures. When the new flat-rate state pension was introduced in April this year, costs increased for many DB schemes due to the end of a ‘contracting out’. This was a catalyst for many to close their scheme. Due to plummeting gilt yields and a less favourable outlook for asset returns, this is only the beginning of the end for open DB schemes.

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“There will be winners and losers across schemes, both in terms of the impact of Brexit on their business and the impact on scheme funding. [Organisations] and trustees will need to tackle the challenges, or opportunities, on a case-by-case basis. On average though, DB pensioners and the [organisations] that support them are much worse off.

“We should not be lulled into a false sense of security with auto-enrolment. While it’s been a huge success with low levels of opt-outs, with contributions at 2% of pay it doesn’t even come close to securing a decent retirement income.”