More than Half Your Salary Is Real Value of DB Pension
05 April 2012 (PLANSPONSOREurope.com) – A 35 year old in the UK joining a Defined Contribution (DC) pension fund today may have to contribute more than ten times the annual contributions of a colleague in a Defined Benefit (DB) pension fund to build an equivalent pension at retirement, according to figures from the Pension Corporation.
This equates to a contribution each year of 55% of gross salary for a DC member compared to the average 5.1% annual contribution rate saved by a DB pension fund member.
After 30 years at these accrual rates, combined with employer contributions, the DB scheme member might have built up an index-linked pension promise of 50% of final pay (or £13,000 a year for someone retiring in 2011 on national average earnings). An individual with a DC pension would require a pot of approximately 17 times final pay (£440,000 in 2011 for someone retiring with national average earnings) to secure this level of pension at March’s annuity rates.
In practice, at current average contribution rates of 8.9% in total, the DC scheme member may be left with a total pension pot of just 2.7 times earnings after 30 years (£70,000 for someone retiring in 2011 on national average earnings). This would buy an annual pension of just 8% of final pay at March’s rates (£2,100 per annum for someone on national average earnings in 2011). The average DC pension pot used to buy an annuity in 2010 was just £25,874.
David Collinson, co-head of business origination, at Pension Corporation, said:
“Leaving aside the far more generous employer contribution rates, the individual in the DB pension scheme benefits hugely from economies of scale in everything from pension administration to asset management fees.”