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Employers set to ‘lose control’ over retirement

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Employers may be increasingly moving to defined contribution (DC) pension schemes to meet their short-term objectives, but they could be storing up longer-term problems, warns Hewitt Bacon & Woodrow.

The results of its annual survey of DC/AVC schemes show that only 3% of employers think that DC members have a good understanding of the funding levels required to build sufficient savings for retirement.

“These figures show that the workforce planning time bomb is ticking,” said Kevin Wesbroom, senior consultant at Hewitt. “While the casualties will be the scheme members themselves, employers will also suffer from the fall-out of dealing with a generation of employees who do not want, and cannot afford, to retire. In addition, the increasing tightening of legislation will mean that managing their ageing workforce will consume progressively greater amounts of HR and management time.”

The survey of over 250 organisations shows that the average contribution paid into DC schemes is around 10% of salary, split roughly 4% from employees and 6% from employers. Hewitt warns that contributions at these levels fall well short of those required to fund benefits that many current retirees aspire to – the mythical two-thirds of final pay.

“Employees have failed to grasp the implications for their retirement plans and are not setting aside anything like realistic sums,” warned Chris Cairns, DC and investment specialist at Hewitt. Based on the average level of DC contributions, an employee joining at age 25 will have to work to age 72 to earn a two-thirds pension – and this would be by investing in shares which carry risk. However, there is also a one in 10 chance of having to wait to age 86! Employers will lose control over the timing of retirement of their employees.”

Worryingly, nearly 80% of respondents believed that their members did not fully understand that the responsibility for retirement funding had been passed to them.

Nevertheless, the survey shows that employers are making available an increasingly sophisticated range of communication and education material. Booklets and annual statements are now universal, with presentations, helplines and the Internet widely used. Nearly one half of schemes now offer some form of interactive modeller or projection tool.

“Despite all these opportunities to learn, employees are still refusing to play their full role,” said Chris Cairns. The solution for employers is not to throw in the towel, but to redouble their efforts and to try a different tack. There is a strong case for them to adopt the next generation of psychological and marketing driven tactics to segment their workforce and to reach them with more carefully crafted and targeted communications. Failure to get employees fully engaged will rebound on employers in the longer-term.”

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