The expected future living standard in retirement provided by defined contribution (DC) pensions increased over the past quarter, Aon’s UK DC Pension Tracker has revealed, with middle-aged savers experiencing the biggest boost.

Over Q3 2023, the tracker rose from 72.7 to 77.5, with all members expected to receive more from their private pension saving compared to the start of the period due to an increase in expected future returns.

Aon attributed the recent improvements to an increase in expected asset returns for the different sample savers, as savers’ pots were expected to provide a higher level of income in retirement, all else being equal, than at the start of the quarter.

However, this was offset slightly by weak benchmark investment returns over the quarter, particularly in growth assets.

Furthermore, while these results suggested that savers are, on average, expected to have a higher standard of living in retirement than was expected at the end of the previous quarter, this masked a more complex picture for individual savings.

In particular, the tracker showed that the 40-year-old saver saw the largest increase in their expected retirement income, at around £1,650 p.a. (or 4.7 per cent), which again was primarily driven by an increase in the post-retirement return assumptions.

Younger savers, meanwhile, saw an increase in their expected income of around £1,000 p.a. or 3.4 per cent, driven by a combined effect of an increase in post-retirement return assumptions and pre-retirement assumptions over the quarter.

However, the oldest saver saw the smallest increase in their expected income - around £350 p.a. (1.8 per cent), as they were the closest to retirement and so benefitted the least from higher future expected returns and were impacted by the relatively weak benchmark returns over the quarter.

Indeed, the oldest saver is also expected to be the worst off in retirement, with a retirement income around 70 per cent of the way between the updated minimum and moderate standards of living.

Commenting on the findings, Aon partner and head of UK retirement policy, Matthew Arends, said: “This period’s Aon UK DC Pension Tracker shows that all savers are expected to be better off in retirement, due to higher expected returns, particularly when they start to access their savings.

“As with any DC pension saving these higher expected future returns are not guaranteed and may or may not occur in practice.

“Interestingly – and for the first time since the Aon UK DC Pension Tracker was introduced in 2021 - our two middle-aged savers are now expected to all but achieve the comfortable retirement living standard.”

The group's analysis also reflected on the potential impact of the government’s plans to extend the scope of auto enrolment to lower earners and younger workers.

This revealed that, for an 18-year-old entering the workforce now, the proposed changes could lead to an increase in their retirement income of around £6,250 a year, or an increase of around 27 per cent, compared to the current system.

Aon suggested that the changes would be particularly beneficial to lower earning employees, including those working multiple part-time jobs, with a cost of around £55 per month for a 18-year-old paying contributions for the first time.

Commenting on these potential improvements, Arends added: “Clearly the effect of the changes to an individual’s retirement income is significant. However, it is important to note that these examples are based around the assumption of a complete (50 year) working life of contributions.

“In reality, many savers are likely to take career breaks or not work full time for the entire period. They may also choose to adjust their contribution levels based on their financial circumstances at any given point in time.

“While contributing 8 per cent per year from 18 is a great place to start, it is important for savers to keep their pension savings under review and maximise their contributions where possible and affordable.

“Aon supports the changes in the Act and believes that it will lead to improved retirement outcomes – and particularly for the lowest paid employees. Many employers already provide contributions above the minimum level required by auto-enrolment.

"For them, the proposed changes may make little or no impact on the employees eligible, or on the contributions paid into their employees’ pension pots.”

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