However the pension consultants pointed out that this overall view masked considerable variation for different cohorts of savers.
Overall Aon’s tracker rose from 72.7 t o 77.5 from July to September this year, indicating that savers of all ages can expect to be better off in retirement, when compared to the previous quarter.
This improvement has been driven by by an increase in expected asset returns both pre- and post retirement for the different sample savers. In particular, 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, Aon believes this more positive forecast overall was offset slightly by weak benchmark investment returns over the quarter, particularly in growth assets.
Aon partner and head of UK retirement policy Matthew Arends, points out that middle aged savers are particualry benefiting from these higher projected returns. He says: “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.”
Looking at the different cohorts with the tracker Aon’s research found that all savers were closer to achieving the ‘comfortable’ level of retirement living standard, as defined by the PLSA, than they were at the start of the quarter:
- The youngest saver saw an increase in their expected income, of around £1,000 a year (or 3.4 percent).This was driven by a combined effect of an increase in post-retirement return assumptions and pre-retirement assumptions over the quarter.
- The 40-year-old saver saw the largest increase in their expected retirement income, at around £1,650 p.a. (or 4.7 percent), again this was primarily driven by an increase in the post-retirement return assumptions, although actual investment performance over the quarter detracted slightly from this increase.
- Savers closer to retirement also saw a significant increase in their expected retirement income, which saw the 50-year-old saver experiencing the second largest increase in expected income over the quarter of around £1,600 per year (or 4.5 percent) when compared with the start of the quarter. This was again driven by increases in pre-and-post retirement return assumptions, although relatively weak returns over the quarter were felt most by this saver, due to their larger existing fund value.
- The oldest saver also saw the smallest increase in their expected income – around £350 per annum (1.8 per cent), as they are the closest to retirement and so benefit the least from higher future expected returns and were impacted by the relatively weak benchmark returns over the quarter.
- Overall, the oldest saver is 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. This excludes any defined benefit pension benefits they may have but which are not included in this projection.
- The youngest saver is currently expected to achieve an income well in excess of the moderate standard of living in retirement. The latest update shows that the 40-year-old and 50-year-old savers are now expected to all but reach the comfortable standard of living in retirement when the state pension is taken into account.
Aon also noted that the proposed changes to auto-enrolment, which received Royal Assent in Parliament during this period, will also be beneficial for DC pension savers. This reduces the
age at which employees are automatically enrolled from 22 to 18, and abolishing the Lower Earnings limit for contributions, meaning contributions would be paid from the first pound earned.
Aon says 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 — an increase of around 27 percent, compared to the current system.
It adds that as a much larger proportion of their income would become pensionable, the changes would be particularly beneficial to lower earning employees, including those working multiple part-time jobs.
When added to the state pension, the changes could mean that an average earner paying automatic enrolment minimum contribution rates is expected to achieve between ‘moderate’ and ‘comfortable’ standard of living in retirement as suggested by the PLSA.
Without the proposed changes, the saver would be expected to receive less than the “moderate” standard of living in retirement.
If an 18-year-old increases their contributions above the minimum to a rate of 12 percent, the automatic-enrolment changes proposed could mean the average earner is expected to achieve the PLSA’s ‘comfortable’ standard of living in retirement.
Arends adds: “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 percent 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 – particularly for the lowest paid employees.”