Pensions - Articles - 55% of your salary - the real value of a DB pension




 A 35 year old joining a Defined Contribution (DC) pension fund today could have to contribute more than ten times the annual contributions of his colleague in a Defined Benefit (DB) pension fund to build an equivalent pension at retirement, according to figures published today by Pension Corporation, a leading provider of risk management solutions to defined benefit pension funds.
 
 This would equate to a contribution each year of 55% of gross salary for the DC member (which in 2011 would have amounted to a contribution of £14,000 for someone on average earnings1), compared to the average 5.1% annual contribution rate saved by the DB pension fund member2.
 
 After 30 years at these accrual rates, combined with employer contributions3, 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 earnings4). 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 total5, the DC scheme member might end up 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 actually only £25,8746.
 
 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.”
 
 The figures give a vivid indication of why most private sector final salary schemes in the UK have long been closed to new employees, with a growing proportion also closed to existing employees. And with millions of new savers due to be automatically enrolled into DC pensions from October this year, the data also reveal the gulf between the pension expectations of those retiring now and those of future generations of pensioners.
  

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