The latest annual OECD global pension report into retirement funding highlights the degree to which the UK trails other nations in terms of occupational pension scheme contributions, says Christine Hallett, CEO of Milton Keynes-based Options For Your Tomorrow.

While Denmark, Chile, Iceland, Israel, Switzerland and Colombia are among a number of countries that demand a mandatory contribution level of at least 10%, the UK's minimum contribution level is two percentage points lower. The decade-long rise in direct contribution [DC] workplace pension participation has been impressive, increasing steadily from 32% of working adults in 2011, plateauing at 72% by 2018. 

The OECD report includes a wake-up call for British workers who mistakenly believe that the current level of contribution to their workplace pension is sufficient to fund a comfortable retirement.

The report says: "Millions more need to be made aware of the fact that they can, and should, either increase contributions to their workplace pension, or establish an additional ‘private pension', such as a SIPP.

At present, far too many people appear to be hoping that the pension fairy will wave her magic wand and everything will be fine. Sadly, this is not going to happen."  

Hallett said: "Workplace pension members must contribute more, either to their existing scheme, or a ‘supplementary' pension such as a SIPP where they may invest in asset classes that align with their longer-term goals. The IFA's role in this process is pivotal." 

Looking at the implications of the OECD report and other recent evidence from equally reliable sources, it's clear that, for the time being at least, the number of people on the cusp of retiring with only DC assets is comparatively small. However, as the volume of retirees benefiting from final salary pensions continues to fall over the next two decades, at least in the private sector, so the DC cohort will grow significantly.

Moreover, evidence suggests that demand from this group for ongoing investment advice and guidance will continue to expand, a scenario which creates huge opportunities for financial advisory firms. 

Since 2012, defined benefit (DB) pension membership has plunged by more than 2.5 million while more than 10 million UK workers have been simultaneously auto-enrolled into DC schemes, shifting the future (and long term) burden of guaranteed levels of pension funding from employer to employee. 

Yet while the auto-enrolment process could rightly be judged an administrative triumph, the longer-term investment success of all DC schemes is directly dependent upon two factors: first, the level of contributions made by employer, employee and, in some instances, the state (in the form of a tax break) and second, the scheme's underlying investment performance. Combined, these factors effectively determine the level of pension an employee will enjoy upon retirement. 

Professional wealth managers have long recognised the importance of asset allocation to investment success; the greater a portfolio's allocation to equities over the long term, the higher the returns. However, the OECD figures below show that several countries have adopted a significantly more aggressive stance than the UK vis-à-vis equities and bonds.

Asset allocation of DC pensions 2020-21 

Country    Equities %  Bonds %

Poland      84.9              8.8
Lithuania 74.4             20.6
Belgium    47.4             45.1
Finland     43.5             21.8
UK              25.6             40.3

Source: OECD

Moreover, while the average allocation of pension assets in 25 OECD nations has witnessed a marked shift in focus over the past decade (equity allocation has risen by 29% while allocation to bonds has fallen by 15%), the level of the UK's equity investment remains on the low side. 

Of course, workers cannot amend the asset allocation of their workplace pension, irrespective of how cautious it might be, a limitation which could result in significant shortfalls in retirement income for DC pension members currently aged under 50. In addition, the minimum combined level of contribution to a workplace pension remains stuck at 8% of salary, far too low to eventually generate a decent retirement income. 

As Christine Hallett says, ‘supplementary pensions' should be encouraged, not least because SIPP members receive a  generous tax break each time they make a contribution; additionally, investments grow tax-free within the SIPP ‘wrapper', while members may allocate assets as aggressively or as cautiously  as they want. 

Earlier this year, a survey conducted by Which found that a single pensioner could live comfortably on £19,000 a year. After taking the state pension (of £9,339) into account, she would, however, require a pension pot of £154,700 to generate the balance of £9,661. Unfortunately, the current average pension pot at retirement is just £61,897, enough to generate around £3,000 from an annuity, but still more than £6,500 short of Which's  comfort threshold. 

Research repeatedly shows that savers who take professional financial advice improve their pension wealth by almost £31,000. The opportunity to emphasise this to millions of DC pension holders should be near the top of every IFA's ‘to do' list.  

By Christine Hallett, CEO of Milton Keynes-based Options For Your Tomorrow