The Aon UK DC Pension Tracker rose over the third quarter from July to September 2022.
According to Aon, this means that compared to the end of the previous quarter, the predicted future living quality in retirement given by DC funds was higher. This aggregate gain, as usual, hides a more nuanced picture that is mostly influenced by predicted returns as opposed to the actual state of the markets.
The tracker increased over the quarter, going from 72.7 to 76.9. This increase, as in prior quarters, is mostly due to higher predicted returns across all asset classes, though the tracker would still have increased over the quarter as a result of favourable benchmark stock returns if adjustments to the future return assumptions are ignored.
According to Aon, this means that on average, sample savers will have a greater quality of living in retirement than was anticipated at the conclusion of the preceding quarter.
The Aon UK DC Pension Tracker is compared against retirement living standards that were established before the recent high levels of inflation. The DC Tracker scores will likely be significantly lower if the rising cost of living is taken into account.
Aon head of UK retirement policy Matthew Arends says: “Given the overwhelming majority of DC savers invest in a default fund, trustees should be considering whether their existing lifestyle strategies and particularly the default investment strategy, are appropriate for their membership. They may also want to consider whether they should be doing more to engage with members over their expected retirement choices and investing accordingly.
“Savers should also be reviewing their investment choices, particularly where they have multiple DC pension pots from previous workplaces, which often can be forgotten about or not considered as frequently as their current pension.
“The current trend of early retirement is undoubtedly complex to unpack but we expect the majority of those leaving the workforce to have significantly defined benefit pensions. As the majority of employees in the private sector are now building up defined contribution savings, there may be a limited window where savers with legacy defined benefits pension can afford to retire early while their peers with DC benefits only, remain in the workforce.
“This trend could however lead to a change in retirement expectations and the way people access their retirement savings. There may be an increase in members accessing their DC savings in their 50s while continuing to work, potentially part-time or in a different career.”