Britons who save for a pension in a defined contribution scheme are on course to face a near 60 per cent cut in income when they come to retire, according to a survey published today by the fund manager Fidelity International.
Based on current pension contributions, Fidelity calculates the average member of a defined contribution scheme will have a pension pot big enough to replace only 38 per cent of what they earn at retirement.
In contrast, those fortunate enough to be a member of a final salary scheme throughout their career will have income equivalent to 81 per cent of their salary at retirement.
Both of the calculations include the payment of a full basic state pension and any State Second Pension entitlement.
According to the survey of more than 1,100 UK workers, people with final salary schemes are on course to retire with a gross annual income of £30,500. However, those contributing to defined contribution schemes would end up with an average salary of £13,200.
Simon Fraser, Fidelity's president of institutional business, said: "The gulf between the retirement expectations of defined benefit and defined contribution pension scheme is astonishing. We don't believe this is because defined contribution pension plans are inherently flawed. The fault lies with the way those arrangements have been implemented. Too few defined contribution pensions adhere to the minimum standards of good practice: automatic enrolment for new employees, generous contribution levels and a good default investment strategy."
He warned Britain was heading for a "two-tier pension nation" unless people in defined contribution schemes started to save more and unless employers start to make more generous contributions.
The research showed workers whose employers do not contribute to their pension were on track for a pension equivalent of just 35 per cent of their final salary. Workers whose employers made a contribution were likely to receive an average of 51 per cent of income at retirement.
"Unless defined contribution plans are brought up to the same quality level of defined benefit schemes, then we will condemn generations of workers to a retirement close to the poverty line," Mr Fraser said. "There will be huge implications for state funding, and possibly for the economy as consumption of goods and services declines."
The research will be updated annually to illustrate the changing shape of Britain's pensions landscape.
The Government is reviewing the UK pension system and is expected to publish a White Paper outlining its proposals for reform within the next few weeks.
Gordon Brown is believed to be uneasy about taking up the Pensions Commission's recommendation to link the state pension to earnings, and has been reluctant to axe the pensions credit system.
Lord Turner of Ecchinswell, the Pensions Commission chairman, says state pension reform will fail without these recommendations being adopted.Reuse content