Defined benefit pensions cost more per year than the average mortgage interest payments warns Fidelity

07 August 2007
The annual cost of providing a defined benefit (DB) pension exceeds the average yearly mortgage interest payments, according to investment management services group, Fidelity International.

Research conducted by Fidelity’s Retirement Institute has revealed that employers need to pay out the equivalent to 24% of a 40-year-old male employee’s salary to be able to provide him with a retirement income of two-thirds of his final pay at age 65. This means finding around £10,000 a year for someone in a £40,000 a year job.

Further data from the Council of Mortgage Lenders has shown that the typical homeowner currently spends around 17.6% of their gross pay on mortgage interest payments meaning a hefty £7,000 in interest payments for a homeowner on a salary of £40,000.

Martin Harris, managing director at Fidelity International explains: “A host of ancillary benefits are hard-wired into defined benefit schemes and inflate the costs for employers. Spouses’ benefits and inflation-proofing measures push up the cost of a DB scheme by nearly a third and beyond the level of interest payments on the typical mortgage.”

The law currently requires annual benefit increases of 2.5% or in line with the Retail Price Index (RPI), whichever is lower, for pensions in payment. It is also compulsory to provide inflation protection up to 5% for deferred pensions in the run-up to retirement.

Faced with such high costs, an increasing number of employers are not offering DB schemes to new employees. To counter this, Fidelity has launched a new model, DB Lite – a means of allowing employers to continue bearing the principal risk of retirement provision, but lowering their costs by offering members a choice of benefits rather the full, gold-plated package.

Martin Harris continues: “DB Lite would allow employers to continue to offer this highly attractive type of pension to their workers. Some companies might even re-open their closed schemes if given greater control over costs. But to implement DB Lite properly, the Government must first make some fairly simple changes to the pension laws.”

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