After decades of decline, the number of people enrolled in final salary pension schemes in the UK private sector could fall below one million by 2020.
That is the stark warning issued by the Pensions Policy Institute, whose new research suggests that automatic enrolment will lead to a significant rise in members of defined contribution schemes.
The figure is expected to reach 16 million by 2020, according to the study, which highlighted the decline in final salary schemes, also known as defined benefit (DB) pensions, since the 1960s.
DB schemes are more attractive for pensioners because they guarantee a certain annuity at retirement based on a final salary and the number of years someone has been a member of the plan.
On the other hand, DC plans provide a retirement payout that is dependent on the amount of money contributed, the performance of investments made by the pension fund and annuity rates when they retire, among other factors, meaning they possess an element of risk.
While final salary schemes are better for pensioners looking to guarantee a set income when they retire, it is much more expensive for employers to link retirement incomes to employees' salaries, so most of these schemes in the private sector have been closed to new members.
Niki Cleal, PPI director, said: "Employers and pension scheme trustees are using a range of strategies to reduce the risks and costs of offering defined benefit schemes in the private sector.
"These strategies range from improving pension scheme funding, to making changes to or closing defined benefit schemes altogether, through to derisking strategies that transfer some or all of the risks to an insurer."
All private-sector workers who are over 22 and earn over the threshold will be auto-enrolled in a pension scheme if they are not already members of one. With the vast majority to be added to DC schemes, it will be important for them to understand how annuities work and the steps they can take to maximise their retirement income.
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