Workers with defined contribution pensions save too little: Report

Weak financial markets accelerated trend of lower contribution levels
By Sarah Mortimer
|payroll-reporter.com|Last Updated: 03/20/2013

(Reuters) — The decline in pension savings is gathering pace as defined contribution (DC) schemes replace final salary plans, meaning more workers in industrialised countries are not putting enough aside for retirement, according to the Organization for Economic Co-operation and Development (OECD).

Workers contributing a total of 10 per cent to DC pension schemes for 40 years only have a 53 per cent chance of targeting 70 per cent of their final salary, said the OECD.

This decreases to 14 per cent if only five per cent is contributed for the same period.

DC pensions are schemes where the annual contribution amount is specified but the future benefits are not guaranteed.

By comparison, there is an average contribution of 20 per cent into final salary pension plans, the OECD said in response to a question.

Weak financial markets have accelerated the trend of lower contribution levels, while workers have little confidence in managing the risks of inflation, interest rate changes, investment and longevity themselves, the OECD said.

The OECD's Working Party on Private Pensions set out recommendations for its 34 member countries.

Its suggestions include using schemes such as the auto-enrolment initiatives in New Zealand and Britain to increase contributions to pension schemes for at least 30 to 40 years if they want workers to retire on adequate private incomes and avoid further pressure on state benefits.

Auto-enrolment enrols eligible workers into a company or national pension scheme but gives them the opportunity to opt out.

If governments want to increase participation rates as much as possible, making pension saving compulsory is the "best way to go", said Pablo Antolin-Nicolas, principal economist, private pensions at the OECD.

In OECD countries, the difference in coverage rates between countries with mandatory solutions, such as Australia, and voluntary private pension systems is as much as 30 per cent, the report said.

In some cases compulsory pension saving may not be politically possible and could be inefficient — in which case, "auto-enrolment is a good second best," Antolin-Nicolas said.

Britain introduced auto-enrolment in October 2012 to combat a soaring pensions bill and nudge up to 11 million people into retirement saving, rather than relying on the state.

Before the government introduced auto-enrolment, the average contributions in Britain to old DC plans was around 8 to 10 per cent, the OECD said.

A report by British insurer Aviva into the auto-enrolment schemes said 37 per cent of employees who are not yet auto-enrolled will reject the choice to save for retirement.

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