On the go: The expected future living standards provided by defined contribution pension savings were higher at the end of the first quarter of 2022 than at the close of last year, Aon’s DC tracker has revealed.
The tracker rose from 56.9 to 61.3, based on the expectations of sample savers across a spread of age categories.
Aon stressed that the increase in expectations was purely driven by a rise in the future expected returns on their pension savings.
“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,” Aon’s head of UK retirement policy Matthew Arends said.
“Ignoring these higher, but uncertain, future returns and instead focusing on the actual returns over the quarter paints a very different picture.”
Based on actual benchmark investment returns during the quarter, the DC tracker would have fallen from 56.9 to 55.8.
Each of Aon’s savers would be expected to be worse off in their retirement, with the reduction in income varying between around £125 and £400 each year, with the 50-year-old saver worst affected.
Aon said that the rise in the tracker was driven by increases in expected asset returns for its different sample savers, although this was partly offset by damp investment performance over the period.
Meanwhile, its youngest saver, at 30 years old, had the biggest increase in expected income at around £1,600 a year, owing to the rise in future expected returns — especially those of growth assets.
Aon also spelt out the dangers of cutting or stopping pension contributions as a measure to limit outgoings during the current period of high inflation.
“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 per annum (30-year-old), £1,350 per annum (40-year-old), £1,375 per annum (50-year-old), and £1,075 per annum (60-year-old),” Arends said.
It could take Aon’s youngest sample saver 30 years to make up for three years of missed contributions, he added.
“Alternatively, savers may have to consider retiring later as a way to bridge the gap,” he said.
“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.”
