DC pension schemes no better than cash savings account, claims study

By Norma Cohen

Published: March 3 2009 02:00 | Last updated: March 3 2009 02:00

Two decades of poor stock market performance have left members of defined contribution pension schemes no better off than if they had left their money in a cash savings account, according to a new study.

And people who started investing only one decade ago will now be holding less in their retirement funds than the total value of all their contributions.

According to an analysis of market returns by the pensions practice at PwC, the dismal performance of stock markets over such a long period of time raises questions about whether existing private pensions models need to be examined.

Raj Moody, partner and chief actuary at PwC, said: "Neither conventional defined benefit or defined contribution schemes appear to be the workable answer."

PwC calculates that a worker who is 50 years old today and who has been paying 5 per cent of salary for the past 10 years into a defined contribution pension would have paid in £24,000 in cash but would today only have £21,000 of savings. That amounts to an annualised loss of 3 per cent.

A worker aged 55 today who had been paying 10 per cent of salary for the past 20 years - equal to about £600 per month in current salary terms - would have seen an annualised growth rate of less than 4 per cent per year, little better than inflation and less than that which could have been realised by saving the cash.

Mr Moody said that for simplicity's sake, it was assumed that the funds were invested in the FTSE All-Share Index. No adjustment was made for fees, which would have erased about a half a percentage point of return over 10 years and a full point of returns over 20 years.

Mr Moody said that the costs and risks of defined benefit pensions - in which the pension pot is a defined percentage of salary - had made it clear to employers that they could no longer go on offering these to workers.

But it is now becoming equally clear that the most widely used alternative, defined contribution pensions, will also leave workers with an inadequate savings pot at retirement.

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