The expected future living standard in retirement provided by defined contribution (DC) pensions increased in Q2 2024, Aon’s UK DC Pension Tracker has revealed, with older members benefiting the most from strong investment returns during the period.

This increase in the tracker has not made up for the fall in 2023 following The Pensions and Lifetime Savings Association’s (PLSA) release of the latest update to its Retirement Living Standards (RLS) and therefore remains at a similar level to 2021.

Over Q1 2024, the tracker rose from 56.8 to 60, due to strong investment returns over the period, which most benefited older savers who have the largest existing funds.

Aon attributed the recent increases to positive benchmark investment performance over the quarter but said this was partially offset by a reduction in the expected future asset returns for the younger two savers.

Although these findings indicated that savers, on average, are anticipated to have a higher retirement standard of living compared to the end of the previous quarter, this overall increase masks a more complex picture for the individual sample savers.

In particular, the tracker also showed that the 40-year-old savers saw an increase of £1,125 (3.2 per cent) per annum in their expected income, due to positive actual investment returns and post-retirement investment return assumptions.

Meanwhile, the 50-year-old savers saw the largest increase, with an increase in expected income over the quarter of around £2,050 per annum (nearly 6.0 per cent).

Furthermore, 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.

However, the oldest savers saw an increase of £475 p.a. (around 2.5 per cent), being the closest to retirement they benefited from strong asset returns over the quarter.

The tracker also showed that the youngest saver’s expected income was unchanged over the period, with the youngest saver currently expected to achieve an income in retirement only slightly above the moderate standard.

However, Aon suggested that the next update which will cover the April 2024 increase to state pension is expected to raise retirement incomes by approximately £900 annually, amidst political commitments to uphold the triple lock mechanism.

The Organisation for Economic Co-operation and Development (OECD) raised concerns about this and proposed to adjust state pension increases based on Consumer Price Index inflation and earnings growth, moving from the current Triple Lock formula that has led to substantial increases in recent years due to inflation and wage growth.

Commenting on the findings, Aon partner and head of UK retirement policy, Matthew Arends, said: “It is, of course, up to governments to decide on national spending and welfare policy.

"What our analysis shows, however, is that, if the OECD’s proposal has been adopted since the single tier state pension began in 2016, outcomes for members would have been affected. 

“But the effect is less than you might expect – our sample members’ retirement outcomes are projected to be about £375 a year lower after tax, or approximately £7.20 a week.

“Having said that, the state pension is of most significance to the lower paid for whom this size of shortfall could make a material difference to their lifestyle.”

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