Nearly half (42%) of directors in the UK’s largest companies would welcome an increase in the contribution rates they pay into their employees’ pension, compared to 26% who wouldn’t, a survey by Hymans Robertson has found. However, a majority of employers believe they already offer ‘suitable’ rates in line with competitors and which will deliver good retirement outcomes, despite evidence to the contrary.

The consultancy firm said that this highlights the continuing disconnection between companies wanting their employees to retire on a decent income and their approach to setting contribution rates and designing their DC schemes.

Employers want their employees to retire on a decent income, which is the second most popular reason for running a pension scheme and 54% of surveyed companies agreed with this. In line with this belief, 75% of companies say that the contributions they offer are ‘suitable for a DC scheme’.

While 70% of companies say they offer rates in line with competitors or the market rate and 54% believes their rates are in line with recommendations from industry bodies, only 47% actually set their contribution rates based on a target income for employees at retirement.

Similarly, only 20% would raise contribution rates if faced with evidence of poor outcomes for scheme members at retirement. However, research has shown that current contribution rates will have to increase for most DC members if they want to reach the annual income of £20,000 that they say they need to live off in retirement.

Hymans Robertson head of DC Lee Hollingworth commented on the findings and said: “42% of company directors saying they would welcome higher contribution rates is promising. However it’s concerning that so many think their current rates are enough for a decent retirement. With nearly a quarter of people relying on their company pension for their retirement income, it’s more crucial than ever for companies to have the right measures in place to support this.

“Despite this belief there is a huge gap between those companies believing they offer good rates and those that actually do. Consumers want an average annual retirement income of £20,000. The current time and effort put into DC by companies and consumers alike suggests few will even get close. The chance of reaching that target, even with years of contributions, is slim to none.

“Raising contribution rates is one part of tackling retirement saving, but in isolation it isn’t enough. DC as a whole needs rethinking and fixing. Companies need to recognise this is just one part of the puzzle that will turn DC schemes into worthwhile investments for all involved.”

The study also found that finance directors see fewer barriers to increasing pension contribution rates than HR directors, with 45% of finance directors stating financial pressures on the company as a barrier to increasing contribution rates, compared to 57% of HR directors. With regards to the barrier of the existing financial commitment to the company’s DB scheme, these percentages are 29% and 39%, respectively. An increase in company profitability is seen as a barrier by 33% of finance directors and 47% of HR directors.

However, Hollingworth said that improving DC is not just about increasing employer contributions. He said the aims of scheme design will also need to be altered, from looking simply at the level of contributions to constructing a target replacement rate in retirement. Furthermore, he said regulation on advice needs to be relaxed and real attention should be paid to what the default fund delivers for different types of members.

On communication and member education, Hollingworth said: “Forget trying to make investment experts out of consumers; an approach which has failed over the past decade. Instead encourage employees to have this target level of income in mind and adopt a ‘do it for me’ approach to help them achieve this.”

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