Defined contribution (DC) pension scheme members could be missing out on up to an additional 70% of retirement income, according to Hewitt Associates’ Defined contribution survey 2007.
The study says that many DC schemes are failing to introduce simple mechanisms that could increase member income, such as salary sacrifice, matched contributions, the open market purchase of annuities at retirement, active management, and SMarT contributions – whereby members agree to raise contributions in order to save more for the future.
Some 31% of schemes do not offer matched contributions, which can add 15% to member income on retirement, while 70% of schemes do not offer salary sacrifice which can provide 15% extra income.
Nevertheless, the research demonstrates that DC funds have grown in the past year, with the median fund doubling from £4 million to £8 million.
This is partly due to a combination of increased contributions and strong returns from the equity market.
The median employer contribution has increased from 6.4% to 6.7% of salary in the past year, while the average total contribution was at 10.5% a year ago and now stands at 11.1%.
The survey of 106 DC schemes, totalling 1.1m members, also showed that over two-thirds of DC schemes were the only pension arrangements available to new members, as many employers had closed their defined benefit schemes over the past year.
| Employer treatment of DC schemes | |
| Schemes not offering salary sacrifice |
70%
|
| Scemes not offering matched contributions (at cost to employee) |
31%
|
| Average total contribution (percentage of salary) |
11.1%
|
| Schemes not offering open market option of annuity |
10%
|
| Median employer contribution (perentage of salary) |
6.7%
|
| Source: Hewitt Associates |
|