Younger employees, in their 20s and 30s, are being urged to avail of employer contributions in Defined Contribution (DC) pension schemes. A representative sample of 3,000 employees by Mercer highlights that 70% of employees under the age of 30 are losing out on an estimated €80 million each year by not taking up the DC contributions on offer from their employers (the average overall employer contribution rate is 7.2% of pensionable salary). Mercer’s analysis indicates that many younger employees are forsaking as much as 10% of their salary each year by not participating in their company pension scheme.
The Government should take the issue of non-participation in DC pension schemes by employees under the age of 30 very seriously. The €80 million foregone each year when added with the employees’ own contributions would grow to some €750 million each year by their retirement. Mr. O’Callaghan, Head of DC at Mercer commented: “These findings should be of significant interest to Government, as these contributions foregone will leave a significant hole in people’s retirement funds in 40 years and will increase the strain on government finances as our population ages”.
Mr. O’Callaghan explained “the current ratio of pensioners to workers is 1 to 5. The ratio in 2050 will be 1 to 2 and the affordability of the current state pension of €230 per week is in question. Therefore, it is critical that younger employees be better supported to plan for their retirement”.
It is commonly assumed that affordability is the main reason why employees under 30 are not taking advantage of employer contributions. However, Mercer’s research indicates that inertia is actually the main problem: in pension schemes where membership was ‘opt out’ as opposed to ‘opt in’, not only did 90%+ of younger employees stay in the Plan but approximately 80% actually maintain the top level of employee contribution.
Mr. O’Callaghan added: “This analysis really points the way for future government policy in this space. A properly constructed auto-enrolled system will significantly increase the number of people saving and the amount they are saving for retirement and lessen the future burden on the state”.
To help employees Mr O’Callaghan suggested that “Employers should introduce a simple pensions framework for employees that is easy to understand and that meets employees changing needs, from the time that they enter the scheme right up until retirement. This should be supported ‘under the bonnet’ by a sophisticated investment engine to drive investment returns”.
A new video by Mercer explains how important it is for Generation Y to plan now for their retirement, especially given a future in which one-in-five of us will likely live to be 100. Shauna Rowley, a young Actuary, who completed Mercer’s analysis commented “What struck me was that retirement may seem a long way away but, for an average ‘20-something like myself’, one year of not availing of an employer-provided DC pension scheme could cost us around €15,000 in today’s terms at retirement.”
Ms Rowely added “The good news is that saving now, no matter how small, will make a big difference later on. This does not require a fundamental change in lifestyle. For example, for employees under 30, by saving the equivalent of the cost of a cup of coffee a day and investing it in your employer matched pension, you could ultimately buy a 3 course meal in a top restaurant in Retirement”.
Mercer is a global leader in talent, health, retirement, and investments. Mercer helps clients around the world advance the health, wealth, and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 42 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and human capital. With over 55,000 employees worldwide and annual revenue exceeding $12 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting.
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