Most employers’ objective for providing a defined contribution pension plan is to ensure the employer competes in the market, rather than to ensure their employees have an adequate income in retirement, according to Towers Watson’s DC Pension Strategy survey.
Only 15 per cent of the UK employers surveyed said their objective for providing a defined contribution (DC) pension plan is to ensure their workers save for an adequate retirement income. Some 65 per cent said market competitive provision was the main objective to offer a DC pension. A small 6 per cent mentioned their objective was to comply with legislation.
Nonetheless, 42 per cent of employers believe their DC plan is currently helping employees to retire. And a quarter think their plan currently ensures their employees have an adequate income in retirement.
Will Aitken, senior DC consultant at Towers Watson said: “At the current time, many employers have focused on what goes into DC – market competitive contributions, rather than what comes out – adequate pensions. The underlying message seems to be that that, like mortgages, employees need to take ownership of their own finances. Of course, the question is whether employees see it the same way.”
The survey uncovered some striking differences in the effectiveness of DC schemes against defined benefits (DB). While 86 per cent of employers felt that DB helps retain employees, and 80 per cent believe DB ensures employees have adequate retirement income, for DC, those figures fall to just 22 per cent in both cases. That’s a remarkable difference – DC is proving an inadequate replacement for some of the best aspects of DB.
Will Aitken said: “Employers need to decide what they want their DC scheme to be, beyond not being DB. Up till now, DC has done a great job of not being DB and can no doubt continue to do so. But given the huge sums of money entering DC schemes, we’re seeing a desire to do better than ‘not DB’.”
Despite only a small number of employers setting the objective for their DC pension to provide an adequate retirement income, almost three-quarters (71 per cent) believe it is the role of the employer to offer services to help their employees as they reach retirement. Some 79 per cent believe employers should ensure their DC plan is tailored to meet their employees’ needs.
More than half of employers are not worried about being stuck with staff that isn’t able to retire. Some 58 per cent think their typical employee would still be able at the age of 65. Around a third (38 per cent) say it is more likely their workers can retire between 66 and 70. Only a small 3 per cent believe their employees will have to work until the age of 75 before they can afford to retire.
Will Aitken said: “Employers do believe they have a role in enabling their staff to retire. That’s not quite the same thing as ensuring their staff will be able to retire. DC is often about providing employees with a framework that offers the possibility of an adequate retirement, rather than the likelihood. As we see the workforce age, we may see employers going further to increase the likelihood of those possibilities – to ensure that they are not left with unwilling employees who can’t afford to retire.”