Significant gap between employee contributions to DC schemes and desired retirement income.
Few employers make up the shortfall: 69 percent of employers contribute 6 percent or less of earnings. (15th February 2016): 92 percent of employees contribute between 0 percent and 5 percent of earnings into their pensions, putting them on track to face a significant shortfall between their actual and desired level of income in retirement. Those relying on their employers to fill the contribution gap may be left disappointed as 81 percent contribute less than 10 percent of earnings. These are the findings of new research published today by Punter Southall Aspire, the new workplace pensions and savings business launched Punter Southall Group.
According to the study, nearly half (46 percent) of employers typically contribute 5 percent–6 percent of pensionable earnings. Based on the average UK salary of £26,500, someone contributing 5 percent of their earnings over a 30 year period, supplemented by employer contributions of a further 5 percent and assuming annualised fund returns of 5 percent, would be left with a pension pot of £183,787. This would provide them with an annual retirement income of £9,190, based on the current average length of retirement of 20 years.
This figure is less than half the amount employees expect to live on when they stop working. Recent research found that, on average, workers say they expect to enjoy an annual income of £22,200 during retirement1. The Punter Southall Aspire research reveals that a pocket of generous employers are helping to significantly boost the pension pots of their employees. The data shows that 19 percent of employers in the UK contribute 10 percent or more, with the majority of these operating in the financial services sector.
Figure 1: Typical employee contributions, Punter Southall Aspire
Figure 2: Typical employer contributions, Punter Southall Aspire
In addition, the survey’s findings include:
Three quarters of employers use basic salary as their definition of pensionable earnings. This means that workers who receive elements of alternative compensation such as bonuses are likely to be at a disadvantage. Around half of employers determine their level of contribution according to that of their employees; meaning there is an added incentive for many workers to increase their contributions. By contrast, only 1 in 20 schemes vary their contributions according to age
Approximately two thirds of respondents reported that their organisation operates salary sacrifice for employee pension contributions. Salary sacrifice is more popular amongst the larger employers surveyed. Over 80 percent of employers with more than 500 staff have adopted salary sacrifice compared to 58 percent of employers with fewer than 500 employees. Alan Morahan, Managing Director at Punter Southall Aspire, said: “Contribution uplifts are essential if the Government is to make further progress with its aim of increasing individual responsibility for retirement saving and reducing the burden on the State.
“The automatic enrolment contribution increases will be a step in the right direction but it looks like a sizeable gap remains between actual contributions and the amount people need to put away to retire with a reasonable standard of living, and at a time that suits them. There is also a danger that some employees contributing at the automatic enrolment minimum levels are lulled into a false sense of security, believing their contributions will be sufficient to deliver a meaningful retirement income.
“Employers can help by informing and educating their workforces. Our research also suggests that most employers recognise the importance of helping their employees plan for retirement and are providing support services to improve their understanding of its advantages and risk factors. We expect the communication role of employers to develop further and indeed some employers, particularly the larger ones, are now taking steps to support employees of all ages with guidance on a wide range of financial matters.”
1PwC, September 2015
*The Punter Southall Aspire survey was conducted between June and August 2015 with responses from 106 employers representing over 100,000 members.
