The expected future living standard in retirement provided by defined contribution (DC) pensions fell “significantly” over the past quarter, following an increase in the expected cost-of-living in retirement, Aon’s UK DC Pension Tracker has revealed.

The Pensions and Lifetime Savings Association (PLSA) released the latest update to its Retirement Living Standards (RLS) earlier this year, revealing a "significant" increase in the expected cost in retirement for all levels, especially moderate, where an additional £8,000 per year would be required for a single person to achieve this standard of living in retirement.

Allowing for the updated living standards meant the Q1 2024 release of the Aon UK DC Tracker showed a significant fall from the previous quarter, falling from 77.5 to 59.3, and has now returned to 2020 levels, suggesting that DC savers’ expected standard of living in retirement have not improved in the last three years.

As a result, all members are now further away from a ‘comfortable’ living standard.

Instead, the tracker showed that the 40-year-old and 50-year-old savers are expected to achieve an income in retirement broadly mid-way between the moderate and comfortable standards.

Meanwhile, the youngest saver is currently expected to achieve an income in retirement only marginally above the updated moderate standard.

However, the tracker showed that, in addition to changing standards, savers’ pots were also expected to provide a lower level of income in retirement, all else being equal, than at the start of the quarter.

Indeed, the analysis showed that, even when excluding the impact of the changes to the RLS, the average score fell from 77.5 to 76 due to lower expected future investment returns.

This means that all members are expected to receive less from their private pension saving compared to the start of the period due to lower expected future returns, both in the approach to retirement and after they begin to access their savings.

In particular, the tracker found that the youngest saver saw a decrease in their expected income, of around £350 p.a. or just over 1 per cent, while the 40-year-old saver saw a decrease of around £185 per annum, or 0.5 per cent.

The 50-year-old saver recorded the largest decrease in their expected retirement income though, with a decrease in expected income over the quarter of around £850 per annum, nearly 2.5 per cent, when compared with the start of the quarter.

Commenting on the findings, Aon partner and head of UK retirement policy, Matthew Arends, said: “The latest updates to the RLS not only allow for price inflation but also ‘expectation inflation’ where there is an increase in the expectations of what is required in retirement at each standard of living.

“This expectation inflation was particularly apparent in the increase of the moderate living standard which increased by nearly 35 per cent and is now around 75 per cent of the comfortable living standard.

“While everyone’s expectations of what constitutes an acceptable standard of living in retirement will differ, this trend will inevitably require an increase in retirement savings.

"Savers should ensure they pay close attention to their pensions savings and consider whether additional savings may be required to achieve the living standard they want in retirement."

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