DC contributions too low to support retirement

Average contribution levels to defined contribution (DC) schemes are still too low to adequately support employees in retirement, despite rising slightly in recent years.

Employers now contribute an average of 6.8% of salary, while employee contributions average 3.6%. Overall, total average contribution rates have risen to 10.4% of salary, up from 9.5% in 2002, according to Mercer’s DC survey 2007.

Tony Pugh, UK head of defined contribution services ar Mercer, said: “Total contributions, while slightly up, still fall short of supporting decent pensions for a majority of people.”

Just 13% of respondents enable staff to make contributions via a salary sacrifice arrangement.

When it comes to measuring the success of a scheme, three-quarters of respondents said that how it is valued by members is a key factor, and just under half (46%) said that providing adequate benefits is a key measure of success. Yet, just 25% of respondents formally measure such success factors, while half rate their success of their plan as average.

“There are clear mismatches between the aims sponsors have for their schemes and what they are actually doing to achieve these. Unless employers meet their top challenge and improve employee understanding it will be virtually impossible to get the members to value the scheme,” said Pugh.

DC pension schemes have become an increasingly popular method of pensions provision, with 63% of DC schemes having been set up since 2000.