Individuals should be saving around 15% of their annual salary into their defined contribution pension over 40 years if they are to have an adequate standard of living in retirement, Schroders has claimed.
Its report, Lessons learnt from around the world, also said DC funds need to follow a real return strategy to hit a target of at least 3% above inflation, as most DC schemes that use a benchmark approach fail to provide real returns. 'You can't eat relative returns', said Schroders head of global strategic solutions, Lesley-Ann Morgan.
'We looked across the world and if you want a two-third salary pension, you need to contribute 15% for 40 years,' she stated. 'Overwhelmingly we found that plans work best when employers and employees both contribute to the scheme.'
Schroders is calling for enrolment in DC schemes to be compulsory, but warned that even some compulsory schemes fell short of the contribution rates required.
It cited a report from the CPA Australia accounting body. This highlighted changes to the Australian auto-enrolment scheme, which will increase contributions progressively to 12% per annum by July 2019. But, CPA Australia found that 'even this may not be high enough for Australians to retire at the current retirement age'.
Schroders backed this veiw. Morgan said: 'We believe that contributions in the majority of countries [with auto-enrolment] are still too low given long-term future return expectations.
'There is significant room for improvement in default design and implementation of default funds. In countries where members are auto-enrolled into DC plans, fiduciary nomination of a default fund is a necessity,' Morgan added.
'A default investment option must be available in the event that the employee does not make an active decision about the fund in which to invest.'