December 16, 2011 6:00 pm

Private sector cuts pension contributions

Some private sector employers are contributing only 5 per cent of their staff’s salaries to their pension schemes – which will result in many employees seeing their income drop by more than 65 per cent in retirement, unless they make additional investments.

Research from the National Association of Pension Funds (NAPF) among its 300 members has found that both employers and employees paid less money into defined contribution (DC) pension funds as a percentage of salaries.

Average employer contribution rates slipped from 7.9 in 2010 to 7.7 per cent this year, with employees’ payments dropping from 4.1 per cent to 4 per cent.

Another survey of company pension schemes covering 1.3m employees, carried out by consultancy firm Mercer, made similar findings.

According to the survey, employers’ contributions this year have been the same as in 2009, but employees’ contributions fell from 4.6 to 4.2 per cent of salary. Overall private sector pension contributions have fallen from 11.8 per cent in 2009 to 11.4 per cent this year.

Mercer’s study found that companies in the financial sector are the most generous in terms of the pension contributions they make for staff.

Employers in banking, finance, insurance and professional services pay an average of 10.3 per cent of salary into schemes, compared with an industry average of 7.2 per cent. That gives a combined contribution from employer and employee of 13.6 per cent, on average.

The lowest contributions are made by companies in the retail sector: an average of 5.2 per cent of salary. Here, the combined contribution is only 9.2 per cent

According to calculations by Mercer for the Financial Times, this contribution rate means that a retail sector employee whose salary rises to £50,000 over the course of a career, and who saves from the age of 40 until retirement at 65 cannot expect to get much more than 30 per cent of salary as a total pension (including state pension entitlements).

Pension levels are more favourable for financial sector employees benefiting from higher contributions. But even then, an identically salaried employee saving from age 40 to age 65 will get less than 40 per cent of their salary as a total pension.

A Mercer survey of more than 1,500 employees found two-thirds of respondents want more saving options.

“There certainly is a strong demand to revise the facilities offered for saving,” said Tony Pugh of Mercer. However, offering more flexibility in savings ranked lowest in companies’ priorities, when they were surveyed.

In spite of the slip in contribution levels, the pensions industry argued that rates were still healthy. “This is not a massive fall,” said Darren Philip, director of policy at NAPF, “with the crisis, people are probably more likely to pay off their debt or to put money into short-term savings.”

However, pension contributions are expected to face a crucial test next year, as automatic enrolment into workplace pensions comes into force.

Under the new law, employees will be automatically enrolled into a DC scheme or the National Employment Savings Trust, unless they opt out. But employers’ minimum contribution will be 3 per cent, and employees will only have to put aside 5 per cent (4 per cent from salary plus 1 per cent from tax relief).

According to the NAPF’s “pension quality mark” scheme, best practice is a minimum contribution rate of 10 per cent, of which 7 per cent should come from the employer.

Pension advisers suggest employees need to calculate what they are on target to receive in retirement and decide if extra investments are needed.

“There is no such a thing as an ideal contribution rate, any more than there is an ideal way of paying off a mortgage,” says Will Aitken of Towers Watson.

“For each person, the issues are different: the amount of state pension they might get, the defined benefits pension they may have from the past, their willingness to take investment risk, when they might want to retire and the amount of money they can save.”

Yann Morell Y Alcover is a former contributor to French newspaper Les Echos

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