The expected future living standard in retirement provided by defined contribution (DC) savings increased “quite significantly” over 2022, Aon’s DC Pension Tracker has revealed, despite rising inflation prompting a significant fall in the tracker in Q4 2022.

The tracker measures the expected retirement outcomes of four sample DC pension savers against the Pensions and Lifetime Savings Association (PLSA)/Loughborough University Retirement Living Standards (RLS)

The PLSA recently issued an update to the RLS, as rising food and fuel prices pushed the minimum living standard up by 19 per cent, with the annual increase in what is needed to reach each living standard over the past year "by far the largest" since the standards were established in 2019.

In light of this update, Aon re-stated its Q4 2022 figures to reflect the increases to these standards, revealing that while the amount of income our sample savers are expected to receive in retirement has not changed, the standard of living that income would support has reduced.

Overall, this led to a reduction of the Q4 2022 tracker from 76.9 to 63.5, in line with the updated living standards.

However, there were improvements throughout this period (September to December 2023), as the tracker rose from 63.5 to 66.9, primarily due to increases in expected returns when the savers reach retirement, meaning their fund values are expected to produce a higher income in retirement than at the previous quarter end.

Aon also found that when ignoring changes to the future return assumptions, the tracker would still have risen over the quarter as a result of positive investment returns, although the increase would have been less pronounced, to 64.1 rather than 66.9.

The tracker also increased "quite significantly" over 2022 as a whole, with Aon suggesting that the expected future living standard in retirement provided by DC savings was therefore higher than at the end of the previous year, even when the impact of higher RLS was included.

However, Aon clarified that this masks a more complex picture for the individual sample savers, noting that 2022 was an "unpredictable year" for asset owners due to the ongoing geopolitical tensions and the knock-on effects for the economy.

Indeed, whilst all of the sample savers are expected to have a higher retirement income at the end of 2022 than they were at the start of the year, this improvement was primarily driven by an increase in future expected returns on their pensions saving.

Aon emphasised that these higher expected future returns are not guaranteed and may not occur in practice, acknowledging that many savers may be "understandably" nervous of relying on unpredictable future returns to make up for a fall in their current fund value.

The tracker also showed that typical investment returns over the year have been poor, particularly for older members who may have had some of their funds invested in bond assets which fell in value over the year.

In addition to this, Aon noted that the value of the expected increase in retirement income has been eroded "significantly" by the current high level of inflation, which means that savers’ income in retirement will buy them less.

"If we allow for the impact of this, as measured by the changes in the retirement living standards, the younger three of our sample savers are still expected to be better off at the end of the year compared to at its start", Aon stated.

"On the other hand, our oldest sample saver is expected to have a lower standard of living than at the start of the year, despite an increase in their retirement income in £ terms.

"Of course, the tracker figures do not allow for the impact of actual saver behaviour over the year.

"The rise in the cost of living may have led to savers opting out or reducing their pension savings which could have a significant effect on their standard of living in retirement.

"Above all, savers should engage with their DC pension and use the freely available tools to check that they are on track for the standard of living they expect in retirement."

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