The expected future living standard in retirement provided by defined contribution (DC) savings improved in Q1 2022, although savers with larger DC pots have been hit worse by weak investment performance, according to Aon’s UK DC Pension Tracker.

The tracker, which measures the expected retirement outcomes of four sample DC pension savers against the Pensions and Lifetime Savings Association (PLSA)/Loughborough University Retirement Living Standards, increased from 56.9 to 61.3 over the quarter.

Whilst investment returns on the majority of asset classes were weak over Q1 2022, the tracker showed that the impact of this was more than offset by increases to the expected future return assumptions across all asset classes.

However, the survey suggested that there is a mixed position for savers, as the impact of the weaker investment performance was more pronounced for those with larger DC pots and for those closest to retirement who have already started to de-risk their investments.

Considering the investment performance in isolation, Aon found a 30-year-old saver would be expected to be around £125 p.a. worse off in retirement, a 40-year-old saver would be around £325 p.a. worse off, while 50-year-old's were the most affected, with their expected income falling by around £400 p.a.

The impact of the weaker investment performance was more than offset by increases to the expected future investment returns though, with younger savers benefiting the most from the increase, with an increase in expected income of around £1,600 p.a.

In addition to this, the sample 40-year-old saver would see a significant increase in their expected retirement income of around £1,450 p.a.

However, Aon partner and head of UK retirement policy, Matthew Arends, stressed that, 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," he stated.

“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.”

Indeed, whilst Aon acknowledged that reducing or stopping pension saving may seem like an easy option to free up additional income, it clarified that tax efficiency of pension saving means that any increase in income may be smaller than expected.

In addition to this, it warned that opting out of pension saving for even three years, when savers would be automatically re-enrolled, could lead to a “significant reduction” in their retirement income.

“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)," Arends stated.

To offset this, Arends suggested that the sample savers "would need to increase their contributions by 1.25 percentage points p.a. (from 8 per cent to 9.25 per cent), 2 percentage points p.a. (from 10 per cent to 12 per cent), 4 percentage points p.a. (from 15 per cent to 19 per cent), and a somewhat unrealistic 21 percentage points 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," he continued.

“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.”

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