Raising contribution rates in DC pension schemes: easier said than done

One of the main consequences of the shift from defined benefit (DB) to defined contribution (DC) pensions in the UK has been a general reduction in contributions made into pensions saving vehicles. There is of course no inherent reason why employers would be prepared to invest less in an employee’s DC pension than in a DB pension. What they gain from the transition to DC, in principle, is the alleviation of risks around investment and longevity. That employers, in general, have taken the opportunity to reduce contributions at the same time is unfortunate, and can be seen therefore as part of a general abdication by employers of their responsibility for employees’ welfare in retirement.

Several developments last week brought the issue of contributions to the fore. As part of its Pensions Outlook 2012, the Organisation for Economic Co-operation and Development (OECD) published a ‘roadmap for the good design of DC pension plans’.

The roadmap stated that:

Making sure people contribute for long periods with sufficiently high contribution rates is the most effective way to improve their chances of obtaining an adequate replacement rate from DC pension plans.

The Association of British Insurers’ (ABI’s) report, published last week, Time to Act, also outlined the decisive impact that contribution rates (and duration) can have on pension outcomes. One of the report’s main aims was to defend the insurance industry against the criticism that charges in DC provision have a detrimental impact on outcomes – they do to some extent, so the argument goes, but not as much as low contribution rates, and in any case charges are a necessary evil.

But the vital question being dodged is how contribution rates can be increased.

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Image: OECD