Steep rise predicted in employee pension contributions

RECENT CHANGES in the pension rules announced in March’s Budget have led to 43% of employers to favour defined contribution (DC) pension plans. This is according to Towers Watson’s post-budget DC Pension Strategy survey, which is compiled amongst 74 UK employers.

The survey shows that 66% of employers think that workers will engage more with their retirement savings since the Budget, with the same percentage believing employees will place more value on their DC pension as part of their reward package. Many companies are expecting an increase in DC pension contributions from employees, with 72% anticipating that employees who are close to retirement will begin to contribute more towards their pension.

Around 20% expect that younger workers will do the same.
However, the employer’s primary objective of providing a contribution to their employees’ DC pensions has not been altered by the Budget. Only 16% of the employers said that their objective for contributing to DC schemes was to ensure employees had an adequate income in retirement, yet 65% stated their reasoning to be market competitive.

The research shows a difference between the 30% of employers who are concerned that employees will use their retirement funds before they retire and the 8% of the same employers who think that employees may run out of money in retirement.

Senior DC consultant at Towers Watson Will Aitken said: “One of the biggest changes could be the anticipated increase in contributions from employees of all ages as more people feel they have more control of their retirement savings and can see the tax advantages more clearly.”

Aitken added that employers are “concerned about the savings choices that employees might make before retirement”, and may still see retirement as a “cliff edge”.

He added: “The Budget may have changed people’s attitudes towards DC pensions but for companies it seems the majority still have a DC strategy that’s focused on the contribution inputs to DC, rather than the ultimate benefit output.”

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