Britons are facing the prospect of having to survive on a quarter of current average retirement incomes in the future as defined contribution schemes fail to yield returns anywhere near those provided by defined benefit schemes.
A report by Centre for Economic and Social Research revealed the gloomy findings for the UK's future retirees and revealed that the total number paying into a defined contribution scheme will overtake the number paying into a defined benefit scheme by 2018.
Defined benefit schemes usually provide a guaranteed final salary to members during retirement. Both employees and companies pay into a pot of investments but any shortfall in the income generated by the investments to fund the final salary must be met by the company.
The risk is shifted onto employees with defined contribution schemes, where the pot of investments that both parties pay into is not topped up to guarantee a specific level of benefit.
The problem, according to Saga – who commissioned the report – is that the public are not planning adequately to ensure that their defined contribution schemes are sufficiently funded.
"The challenge the report identifies is stark. For those earning £25,000 over a 25-year period with salary increases around 2.5 per cent each year and making today’s typical defined benefit contributions they will have contributed close to £180,000. But for those on a typical defined contribution their total would be just £40,000," said managing director of Saga Investment Services, Nici Audhlam-Gardiner.