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The Actuary The magazine of the Institute & Faculty of Actuaries

DC scheme members 10 times worse off than with DB pension

A 35-year-old joining a defined contribution (DC) pension fund today could have to contribute 10 times more annually than a colleague in a defined benefit (DB) fund to build the same retirement pot, according to figures from Pension Corporation.


This equates to an annual contribution of 55% of gross salary for the DC member (which in 2011 would have been £14,000 for someone on UK average earnings), compared to the average 5.1% annual contribution rate saved by the DB member, the firm said.
After 30 years at these accrual rates, combined with employer contributions, Pension Corporation said the DB scheme member might have built up an index-linked pension promise of 50% of final pay (or £13,000 a year for a 2011 retiree on national average earnings).

An individual with a DC pension would require a pot of approximately 17 times final pay (£440,000 for a 2011 retiree with average earnings) to secure this level of pension at March’s annuity rates.
The firm said that in practice, at current average contribution rates of 8.9% in total, the DC scheme member might end up with a total pension pot of just 2.7 times earnings after 30 years (£70,000 for a 2011 retiree on average earnings).

This would buy an annual pension of just 8% of final pay at March’s rates (£2,100 per annum for someone on average earnings in 2011).

The average DC pension pot used to buy an annuity in 2010 was actually only £25,874.
David Collinson, co-head of business origination, at Pension Corporation, said:
“Leaving aside the far more generous employer contribution rates, the individual in the DB pension scheme benefits hugely from economies of scale in everything from pension administration to asset management fees.”
The firm said the figures, based on ONS and ABI data and subject to certain assumptions, demonstrate why most private sector final salary schemes in the UK have long been closed to new employees, with a growing proportion also closed to existing employees.

With millions set for auto-enrolment in DC pensions from October, Pension Corporation said the data highlighted the gulf between the pension expectations of those retiring now and those of future generations of pensioners.