Future DC saver incomes rise despite poor returns
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A defined contribution tracker index shows defined contribution pension savers’ future incomes went up over the second quarter of this year, mainly because of state pension increases, with older savers benefitting the most.
Consulting firm Aon’s UK DC Pension Tracker suggests the expected future living standard in retirement provided by DC savings was higher than at the end of the previous quarter.
Rises in the state pension, which is uprated in line with the highest of inflation, earnings or 2.5%, compensated for the effect high inflation had on savers’ future pension incomes. The full state pension went up by £972 a year in April, with the rise benefitting both current and, potentially, future pensioners.
The UK state pension, which has historically been low in comparison with other European nations, stands at £10,600 a year now for those with 35 years or more of national insurance contributions. The triple lock policy has been slowly increasing the net replacement rate, which in 2020 was below the OECD average.
According to Aon, the state pension is now “almost sufficient to provide the ‘minimum’ retirement living standard” of £12,800 for a single person household, as calculated by the Pensions and Lifetime Savings Association.
The rise comes despite poor investment returns on DC pensions for older savers and falling expected future returns for younger ones.
Matthew Arends, partner and head of UK retirement policy at Aon, said: “This period’s Aon UK DC Pension Tracker shows that older savers were detrimentally affected by poor actual returns over the quarter. By contrast, the actual returns for younger savers were relatively strong, but it was this group that was the most impacted by falls in expected future returns.”
Arends added that all members benefitted from the increase in the state pension that was implemented from April however.
“This more than compensated for the negative factors, meaning that each of our savers had a higher score at the end of the quarter,” he explained, pushing the tracker up to 72.7 from 69.7 at the end of Q1.
State pension increase compensates for poor DC returns
The impact inflation has had on future pension incomes has also been partially, though not fully, offset by salary increases.
The Aon UK DC Pension Tracker models the expected retirement outcomes of four sample members aged 30, 40, 50 and 60, based on typical values and Office for National Statistics salary data for the country as a whole.
