The expected future living standard in retirement provided by defined contribution (DC) savings fell in Q2 2023, Aon’s UK DC Tracker has revealed.

Over the quarter, the tracker fell from 69.7 to 67.9, which Aon attributing "almost entirely" to reductions in future expected returns, meaning sample savers’ savings are expected to produce a lower income in retirement than in the previous quarter.

The negative impact of this reduction in expected future returns was partially offset by strong benchmark investment returns over the quarter, although this had a more pronounced impact on older savers.

Indeed, the tracker revealed that older savers were the least impacted by this overall fall, as they benefited from higher-than-expected actual returns in early 2023 and were the least impacted by lower expected future returns.

Younger savers, however, experienced the largest fall in expected income of around £1,075 p.a. or 3.35 per cent, due to a decrease in expected future returns both over the period until retirement and when they start taking their benefits in retirement.

Looking forward, Aon also warned that high inflation poses challenges for investment strategies, arguing that while the record high inflation seen in 2022 began to tail off in the first quarter of 2023, inflation is proving to be ‘stickier’ than first expected.

The report also explained that while younger members are likely to have a significant investment in equities that over the long term should provide returns above inflation, older members are likely to have started moving towards more defensive assets, which may struggle to provide sufficient protection in the current inflationary environment.

Aon stressed that this is particularly important for members who are planning on taking a regular income in retirement, and who would hope to achieve returns in excess of price inflation to maintain their standard of living in the long run.

Aon DC solutions chief investment officer, Jo Sharples, stated: “There is a range of different investment strategies in the marketplace at the moment. In our own funds’ default strategy we take an outcomes-centred approach and favour a higher growth allocation heading into retirement.

“This reflects most members wishing to access their savings flexibly when they retire, and therefore remaining invested for many years. There will therefore be the need to deliver above inflation growth to maintain the purchasing power of investments as members start to withdraw their savings.”

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