Personal Pension  

Average DC pension contribution is 6%

Average DC pension contribution is 6%

The average contribution to a workplace defined contribution pension scheme is 6 per cent of gross salary, which is a level significantly short of what is needed to secure a comfortable income in retirement, according to Columbia Threadneedle Investments.

The firm’s research showed 4 per cent is paid by the employer and 2 per cent by the employee.

As DC schemes become the prevalent form of pension savings in the UK, there could be around 14m people contributing by 2030 - up from 11m today - while the median DC pot could grow from £14,100 today to £56,000 in 20 years time due to a longer period of saving.

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According to the Pensions Policy Institute, employees and employers may have to contribute between 11 and 14 per cent of the employee’s salary to a DC scheme and start saving at the age of 22 to have a two in three chance of generating an adequate income in retirement.

The Tax Incentivised Savings Association’s policy project TSIP recently proposed that UK pension savers should attempt to push past the 8 per cent auto-enrolment contribution target in 2018 and towards a longer-term goal of 12 to 15 per cent needed to ensure an adequate replacement ratio in retirement.

At the end of September, Office for National Statistics figures showed that active membership of private sector occupational pension schemes leapt from 2.8m in 2013 to 4.9m in 2014, but average total contribution rates had fallen to 4.7 per cent in 2014, from 9.1 per cent in 2013.

Columbia Threadneedle also found the majority of savers invest in the DC scheme default fund, possibly due to the complexity of the investment choices available and a lack of advice.

Campbell Fleming, the firm’s EMEA chief executive, explained it partnered with the PPI to encourage a better understanding of UK workplace savings.

“In our view the emphasis is on both employers and employees to consider increasing joint contribution levels.

“But it is also up to us asset managers and investment solution providers to work with savers, policy makers and trustees to make investment choices simpler and more intuitive in order to encourage engagement with pensions early on.”

He argued that default funds are often heavily skewed towards equities and therefore carry a higher risk, which may be appropriate in the early stages of savings, but not when investors are closer to retirement.

“We believe pension portfolios should have a dynamic asset allocation framework, where portfolio managers chose investment assets from the ground up and target real returns (instead of a market benchmark) with lower levels of volatility than equities.”

peter.walker@ft.com