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Economic uncertainty leads to stagnation of pension contributions, Mercer reveals

Contributions to UK defined contribution (DC) pension schemes have stagnated as employers face tough market conditions and the challenge of introducing auto-enrolment, according to a Mercer survey.

Despite growing steadily for the last 10 years employer contributions have, since 2009, frozen at an average of 7.2%. In parallel, pension scheme member contributions have dropped from 4.6% to 4.2%.

Mercer’s research analysed the DC pension offerings of over 300 UK companies, representing 1.3 million employees and £14.3 billion in assets under management.

Mercer found from a member’s perspective, volatile market movements, low contribution rates and increasing annuity prices will result in a longer working life or less money in retirement. A 50 year old sample person can currently expect to receive £145 less in monthly retirement income than was projected in 2009 and a person in their thirties is looking at roughly £100 less.

The calculations showed that annuity rates have increased by an average of 20% since 2009, hampering members’ probability of obtaining a good retirement income. This dramatic increase has meant that someone with a DC pension pot of £200,000 at age 65 can now only expect to get an annuity of around £5,800 a year, compared to 2009 when they could have got £7,000 a year.

Tony Pugh, European head of DC consulting at Mercer, said: “When considering the financial and regulatory pressures pension schemes are facing, the stagnation in employer contributions doesn’t come as a big surprise. Once companies start to feel the impact of auto-enrolling swathes of employees there is even a risk of their contribution levels dropping in the short term. With a double-dip recession looming things are likely to get worse before they get better.

“We expect however, that rates will trend upwards again over the long term, as employers start to recognise that lowering DC contributions will change the workforce profile as a result of older employees having to work longer. Equally employee pressure to increase contributions is likely to have an impact.

“The impact on individual members is significant, especially for those about to retire. Members should keep a close eye on how their pension pot is invested and make sure to shop around for annuities to get the best out of their retirement savings. Those eligible are likely to increasingly use drawdown options, but these are not without downside risk as investment values could fall.”

Mercer’s calculations showed a person nearing retirement may need to work for over three years longer in order to retire on the same income they expected based on conditions back in 2009.

A younger person is looking at an even longer delay, though he or she has more time to correct this prospect by increasing contributions going forward. However, with Mercer’s latest salary survey projecting UK pay to rise by only 3% over the next year – less than the projected rate of inflation - this will be a tough challenge to meet for most scheme members. Mercer also surveyed more than 1,500 employees and when asked about how the current economic and regulatory environment might impact their retirement prospects most of the participants were realistic.

Whilst 82% would like to retire before the age of 65, over 50% expect to retire after the age of 66. For those closer to retirement (aged 55 to 64) a third (32%) expected to retire between the ages of 66 and 70 and 6% expect to retire after age 71.

Pugh added: “It’s encouraging to see how realistic employees are about the future. “Considerable media attention on pensions has clearly had an impact as many employees now realise that they will have to work beyond the traditional retirement age. Following the removal of the default retirement age, it is inevitable that employers will experience a significant increase in ’late retirees’. Questions remain as to how well prepared employers are to deal with the change. Additionally, younger employees will have difficulties moving up the career ladder as senior positions remain filled. ”