Employees with defined contribution (DC) pensions may get away with working for fewer years to achieve a reasonable income in retirement due to surging equity prices, says Mercer.

The financial consultant's new DC Barometer looks at changes in annuity and investment markets as well as contribution levels, and how they can influence expected retirement ages and income for DC members.

Stock market conditions and annuity price movements at the end of December 2009 compared to December 2008 shows that a sample scheme member considering retirement can work around 15 months less in order to retire on the same expected income.

"With the recent turbulent stock market conditions and volatile annuity prices, the outlook for people nearing retirement is looking better now than it has over the last nine months," commented Steve Charlton, a principal and senior consultant at Mercer. "At the worst point, in Mach 2009, a member would have found themselves working on until nearly age 67 instead of 65, to achieve the same level of income."

Charlton said the findings highlight that an important element of retirement for DC members is timing. "With the rise and fall of stock markets and annuity prices, the value of individual pension pots can swing up and down, and significantly influence people's quality of life in retirement."

However, Mercer said that when it comes to employers, this is not particularly great news, as it can be more difficult to predict when a DC scheme member will retire.

"While members of DB schemes can generally be expected to retire at the same time, the retirement date of DC members will be less predictable," explained Tony Pugh, UK head of defined contribution services at Mercer. "Some members may decide to retire early to take advantage of good market conditions while others may have to continue working until they can afford to go, if the market is unfavourable.

"Those employees who decide to retire early are more likely to be senior managers or highly skilled employees, as these groups generally have better opportunities to save for their retirement. Losing these key employees earlier than expected could have a detrimental impact on the running of the business."

Twenty-four per cent of employers in a recent DC survey by Mercer monitor the adequacy of members' retirement benefits from their DC schemes, and 34 per cent look at the investment options members select. Less than 40 per cent offer assistance to their members when converting DC funds to retirement income.

Charlton advised that companies form a picture of the benefits that are adequate in their pension plans, and keep an eye on how well their employees are preparing for retirement to indicate when they plan to leave the workplace.

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