DC pension contributions increase little in past 10 years

Average rates of contributions into defined contribution (DC) pension schemes have changed very little over the last decade, according to research by the Association of Consulting Actuaries (ACA).

The 2013 ACA Pension trends survey, which questioned 308 employers with more than 430 pension schemes, found that contribution rates are generally failing to keep pace with the pension costs associated with longer life spans and an economic climate with low investment returns.

The research also found that average employer contributions into DC pension schemes were between 4.5% and 7% of earnings, while average employee contributions were between 4% and 4.5% of earnings.

Almost six out of 10 (57%) respondents support the idea of automatic escalation schemes, where scheme members are encouraged to increase their pension contributions at a future date often in line with increases in earnings.

The research, which also asked respondents about auto-enrolment, found that the most problematic areas of the legislation are the processes involved in preparing for auto-enrolment, followed by regulatory complexity and communications.

It also found that eight out of ten smaller employers have not yet budgeted for the likely increase in costs arising from auto-enrolment.

When budgeting for the cost of auto-enrolment, the median band of large employers (with 5,000 or more employees) expected employee opt-out rates to be between 6% and 10%.

However, the median band of small employers (with 49 or fewer employees) are budgeting on the basis of employee opt-out rates of between 26% to 30%.

The research also found:

  • 61% of respondents expect their payroll costs to rise by up to 2% as a result of auto-enrolment, but 46% of smaller employers expect payroll costs to rise by more than this.
  • More than half of respondents expect to enrol all eligible jobholders into either an existing or a new DC pension scheme, while a fifth expect to enrol staff into the National Employment Savings Trust (Nest) or a multi-employer scheme.
  • 49% of small employers have not yet made a decision about their auto-enrolment scheme provider.
  • Around eight out of ten employers said their employees typically retire at age 65 or younger, but by 2020 two-thirds expect the typical retirement age to be 66 or later. 

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Andrew Vaughan (pictured), chairman of the ACA, said: “With most employers seemingly auto-enrolling at the minimum level of contributions (2% of qualifying earnings), we can expect average contributions to decline over the next few years before climbing in 2018, when the minimum of 8% of qualifying earnings will be required by all employers. 

“Auto-enrolment on its own isn’t enough. That is why we support the [government’s] defined ambition agenda, and the survey is also encouraging in showing employers’ support for auto-escalation schemes.”