PPI report highlights lack of retirement income certainty for DC savers

Greater certainty of income in retirement is more likely attained through the state pension and defined benefit (DB) pension scheme membership as defined contribution (DC) schemes cause a far wider spread of outcomes, according to the Pensions Policy Institute (PPI).

The organisation, which had previously estimated that the number of DB schemes open to new members or new accrual could fall to fewer than 850 by 2030, acknowledged that DC pension schemes can produce higher income in retirement, although it countered that this was associated with rising downside risk, meaning that poorer outcomes were more likely in a DC scheme.

Looking to analyse the effects of DB scheme closure, the PPI delved into retirement income projections for hypothetical individuals based on different scenarios, such as their DB scheme remaining open until retirement, their DB scheme being replaced by a DC scheme in 2025 and the DB scheme closing immediately to be replaced by a DC scheme.

It pointed out that: “DC pensions give far more varied outcomes as they are subject to uncertain investment return. This lack of security provides a far wider spread of results when an individual is more dependent on DC savings rather than DB entitlement or state pension income.”

For example, a low-income man currently aged 28 would be likely to receive annual retirement income of around £25,000 if his DB scheme remained open until retirement, with very little variation.

However, both other scenarios showed a much wider spread of possibilities, with immediate DC replacement implementation and DC replacement from 2025 both showing highest and lowest possible incomes of above £30,000 and below £20,000.

Additionally, it was noted that leaving the DB scheme 5 years later may produce marginally lower retirement incomes than leaving the scheme immediately, as a DC scheme could have a more ambitious growth-seeking investment strategy and potentially secure a higher yield over the long term.

The PPI also noted that the contribution rate modelled for was 25 per cent of earnings for the DC scheme, split between the employer and employee, with modelling for minimum contribution levels and 15 per cent contribution levels showing retirement income most likely to drop below £20,000.

However, this is not to say that DB retirement income was higher in every case, as a woman aged 25 who was on low income and would work part time during retirement was deemed to have an average retirement income of £13,500 with a DB scheme, but had average incomes of £16,800 and £17,900 with DC replacement schemes in 2025 and immediately respectively.

However, these figures both applied to contribution rates of 25 per cent, which the PPI said was comparable to average contribution rates in DB schemes, with minimum contribution levels determined to return average retirement incomes of £11,400 in both scenarios.

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