who will have to rely on income from defined contribution (DC)
private pension plans when they retire, warns Fidelity
International (FI).
The warning is based on the findings of the asset management
company’s third annual Fidelity Retirement Index study that, based
on 2007 data, indicates that the average member of a DC scheme
faces a massive slump in income after retirement. FI noted that its
retirement study is based on survey results and “complex financial
modelling.”
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According to FI while most workers who are still members of a
defined benefit (DB) pension scheme can expect to retire on
two-thirds of pay after 40 years of service, members of DC schemes
are far worse off.
FI estimates that workers in DC schemes are on course to receive
the equivalent of only 38 percent of their salary in retirement – a
decrease of 62 percent or less than £174 ($344) per week for
someone on average earnings.
Overall, based on all sources of income including state pension
benefits and private pensions, FI estimates that the average member
of a DC scheme can expect to retire on just £215 per week, a figure
representing a 53 percent drop in income.
Notably, £215 is less than half of national average earnings of
£457 per week and below the current minimum wage of £220 for a 40
hour working week. FI pointed out that while the situation in 2007
was slightly better than in 2005 when DC scheme workers faced a 58
percent fall in post retirement income, it had worsened compared
with the 50 percent fall indicated in 2006.
In addition, FI stressed that overall prospects could rapidly
deteriorate as DC schemes replace defined benefit schemes.
Commenting on the findings Simon Fraser, president of FI’s
Retirement Institute said: “There’s nothing inherently wrong with
defined contribution pensions. In fact, DC is arguably a better
solution for today’s highly mobile workforce.
“But the move from DB to DC is often accompanied by a review of
contribution levels, sometimes to the detriment of employees. It is
a shocking thought that, if this is not corrected, we could see the
emergence of a generation of private pension paupers.”
FI undertakes similar retirement studies in a number of countries,
including the US, Germany and Japan. The UK does not fare well in
the comparison.
While UK workers are on course for 47 percent of their pay in
retirement, Germans have a replacement rate of 56 percent and
Americans are on track to receive 58 percent of salary in
retirement. Only Japan is on a par with the UK with a similar
replacement rate of 47 percent.
