Members missing out in DC schemes

Members of defined contribution pension schemes could be missing out on up to an additional 70 per cent in retirement income, according to Hewitt\'s annual DC survey.

The research, which covers 106 DC schemes totalling more than 1.1 million members, shows that many DC schemes are not as efficiently run as they could be, with many failing to introduce simple mechanisms that could considerably increase member income.

The survey found a significant number of schemes do not use salary sacrifice, matched contributions, a contribution structure which automatically escalates with age, active management or offer the open market purchase of annuities at retirement.

Combined, these tools could increase future retirement income by 70 per cent, the report concludes.

Hewitt put the cost of salary sacrifice at 15 per cent of additional income, with active management responsible for a further 10 per cent and open market option annuities adding another 10 per cent.

It says a 20 per cent increase in pension return can be achieved through automatic escalation of contributions by the employee and 15 per cent uplift can be gained by matched contribution, although this last solution would incur increased cost for employers.

Chris Cairns, DC specialist at Hewitt Associates says: “Employers, trustees and members could all be doing more to improve efficiency and value for money, but many sponsors and trustees are being forced to make managing their defined benefit scheme risk a priority over maximising future benefits in their DC scheme.

“Last year’s survey found that, despite the best intentions, DC schemes had not sufficiently persuaded employees to take control of their retirement savings, and that trustees were still making most of the decisions.

“These results show that employers, trustees and members now need to take joint responsibility for increasing the efficiency of their DC arrangements, and to develop proactively a more sophisticated way of increasing future benefits.”