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Workers with defined contribution pensions save too little
March 6, 2013 / 11:22 AM / 5 years ago

Workers with defined contribution pensions save too little

LONDON (Reuters) - The decline in pension savings is gathering pace as defined contribution schemes replace final salary plans, meaning more workers in industrialised countries are not putting enough aside for retirement, the OECD said.

Workers contributing a total of 10 percent to DC pension schemes for 40 years only have a 53 percent chance of targeting 70 percent of their final salary, the Organization for Economic Co-operation and Development said on Tuesday.

This decreases to 14 percent if only 5 percent is contributed for the same period.

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

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

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 included using schemes such as the auto-enrolment initiatives in New Zealand and Britain to increase contributions to pension schemes for at least 30-40 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”, Pablo Antolin-Nicolas, principal economist, private pensions at the OECD said on Monday.

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 percent, the report said.

Antolin-Nicolas said that 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”.

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 8-10 percent, the OECD said.

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

Reporting by Sarah Mortimer; Editing by Anthony Barker

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