The main motivation for offering a defined contribution (DC) pension scheme is not to ensure employees have sufficient income in retirement but to keep the employer competitive, Towers Watson’s DC Pension Strategy survey has discovered.
Only one in seven (15%) of UK firms surveyed said that the objective of their DC pension scheme was to help workers save adequately for retirement.
More than half (65%) stated that market competitive provision was their main reason for providing a DC pension, and a small proportion (6%) cited compliance with legislation as their objective.
However, despite the typical reason for offering DC pensions being competitive in nature rather than to promote saving, a significant percentage (42%) of employers believe their pension provision is helping their employees to retire, and a quarter have opined that their plan ensures employees have sufficient income in retirement.
Will Aitken, senior DC consultant at Towers Watson, said that presently many employers were focusing on the market competitive contributions that went into DC schemes, instead of the adequate pensions that come out.
Towers Watson’s survey uncovered a number of substantial differences between the effectiveness of DC and DB (defined benefit) schemes.
A large majority (86%) felt that DB schemes helped to retain workers and 80% believed DB schemes offered adequate retirement income, but the figures for DC schemes fell to just 22% in both instances.
Aitken said that employers needed to decide what they wanted their DC scheme to be, and that there was a desire for DC schemes to be better than ‘not DB’.
He added that DC schemes often provide the possibility of adequate retirement income, but not the likelihood.
With the life expectancy of the UK continually rising and people working longer Aitken suggested that employers may go further to increase the likelihood of adequate retirement income, if only to ensure they are not lumbered with unwilling employees who cannot afford to retire.