Aon’s UK DC Pension Tracker increased from 56.9 to 61.3 during the first quarter of 2022, from January to March.
The rise in the DC tracker indicates that retiree living standards for our sample of savers are anticipated to be higher than they were at the conclusion of the previous quarter. But an increase in the predicted future returns on their pension assets is the only factor driving this rise in living standards, according to Aon.
Aon partner and head of UK retirement policy Matthew Arends says: “As with any DC pension saving, these higher expected future returns are not guaranteed and may or may not occur in practice over our sample savers’ working lives. Ignoring these higher, but uncertain, future returns and instead focusing on the actual returns over the quarter paints a very different picture.
“If we just look at the actual benchmark investment returns over the quarter, the Aon UK DC Pension Tracker would have fallen from 56.9 to 55.8. Each of our savers would be expected to be worse off in their retirement with the reduction in income varying between around £125 and £400 each year.
“Understandably, many savers may be nervous of relying on unpredictable future returns to make up for a fall in their current fund value. However, none of the alternatives are necessarily that attractive: contributing more, retiring later or accepting that one’s standard of living may be lower than hoped.”
Arends adds: “If each of our sample savers were to opt-out for the next three years they would see an expected reduction in retirement income of around £1,500 p.a. (30-year-old), £1,350 p.a. (40-year-old), £1,375 p.a. (50-year-old), and £1,075 p.a. (60-year-old).
“If they wanted to try and make up this shortfall, individuals may consider increasing their future pension contributions when they re-enrol. Our sample savers would need to increase their contributions by 1.25 per cent p.a. (from 8 per cent to 9.25 per cent), 2 per cent p.a. (from 10 per cent to 12 per cent), 4 per cent p.a. (from 15 per cent to 19 per cent), and a somewhat unrealistic 21 per cent p.a. (from 20 per cent to 41 per cent) respectively. This increased contribution would need to be paid each and every year until retirement to make up the shortfall. In the case of the youngest member that will be for over 30 years – just to make up for the three years of missed contributions.
“Alternatively, savers may have to consider retiring later as a way to bridge the gap. While this is unlikely to be an appealing prospect, when faced with the choice of potentially having to work longer at some point in the future or having the money to pay their heating bill now, it is easy to see why some members may choose to reduce their pension saving or stop it entirely.”