Millions urged to pay more into their pensions

Last updated at 01:41 28 September 2007


Contribution levels to most pension schemes are too low to provide a decent income during retirement, workers were warned today.

Consultancy group Mercer said if the amount of money paid in stayed the same, the majority of members would get more from the state pension than they did from their occupational scheme.

Mercer also pointed out that defined contribution pensions, under which companies only guarantee how much they will pay in and not what the pension will be worth at retirement, had become increasingly popular in recent years as firms closed their more generous final salary schemes.

Nearly two-thirds of defined contribution schemes had been set up since 2000 and 93 per cent of the 400 companies Mercer questioned now only offered a defined contribution scheme to new staff.

But researchers said that despite there being a slight increase in the amount of money paid into the schemes in recent years, contribution levels still averaged only 10.4 per cent of a member's pay. Employers currently contribute about 6.8 per cent of a worker's salary, with individuals putting in 3.6 per cent.

The consultancy group said this meant employees were left meeting a third of the cost of their pensions and shouldering 100 per cent of the risk.

Tony Pugh, head of defined contribution pension services at Mercer, said: "Total contributions, while slightly up, still fall short of supporting decent pensions for the majority of people.

"At the current rate, most employees will get more pension through state benefits than their occupational plan, which may come as a surprise to many. The problem is more acute the higher an individual's pay, and the older they are on joining the plan."

Research carried out by the group found that 52 per cent of people expected to get an occupational pension worth more than half of their pay before they retired.

But it warned that at current contribution rates the average person who had been a member of a scheme for 30 years was more likely to get a pension worth just 20 to 30 per cent of their pay.

Mercer said it was essential that employees were encouraged to do more to boost their pension provision. It said automatically enrolling people into pension schemes and having companies match employee contributions helped boost savings levels.

The group said the potential for higher pensions was also being lost as people were not being encouraged to shop around for annuities when they retired, despite the fact that annuity rates could vary by up to 25 per cent across different providers.

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