Pensions - Articles - DC Pension Tracker Q2 2024 tracking the Triple Lock effect

 Over Q1 as a whole, the Aon UK DC Tracker rose which suggests the expected future living standard in retirement provided by defined contribution (DC) savings was higher than at the end of the previous quarter. As usual, this overall increase masks a more complex picture for the individual sample savers.

 Older savers, particularly those with the largest existing pension funds, had the largest increase in their expected retirement income, while the expected retirement income of our youngest sample saver was effectively unchanged over the period.

 

 Note, the sample savers used in the Aon DC Tracker were ’re-set’ to their original age and fund values at the year-end which results in the discontinuity (shown in grey in the chart above) as at 31 December 2023.

 As a reminder, in February 2024 the Pensions and Lifetime Savings Association (PLSA) released an update to its Retirement Living Standards, which showed higher outgoings were required in retirement across all three standards. The Q1 2024 release of the Aon UK DC Tracker showed that it fell significantly after being restated to reflect these updates, as shown on 31 December 2023 in the chart above.

 Over the quarter (January to March 2024) the Tracker rose from 56.8 to 60.0. This rise was driven by strong investment returns over the period, which most benefited our older savers, who have the largest existing funds. The youngest saver (with a relatively small pension, pot built up currently) saw no change in their expected outcome over the quarter.

 
 Source: Aon UK DC Pension Tracker (1 January to 31 March 2024)
 
 Salary increases help boost the tracker with increases to the state pension to come
 As part of the annual ‘re-set’ of our sample savers to their start year age and fund values, the salaries of our sample savers have been updated to reflect the most recent ONS salary data. While this update helped boost the re-set tracker figure at the start of the period, it was more than offset by the other effects of re-setting the sample savers to their start of year position. In particular, the removal of the positive investment performance achieved over 2023 meant the re-set saw the start of year tracker position fall by 2.5 points from the previous year-end position. However, without the update to reflect ONS salary increases, this fall would have been even more marked with the start of year position being a further 4.5 points lower.

 However, the next quarterly update, which will cover the period from 1 April 2024 to 30 June 2024, will reflect the April 2024 increase to the state pension. This will further boost the Tracker score next quarter, with, all else being equal, all members’ retirement incomes increasing by around £900 per Annum. Commitments made to the Triple Lock - but the OECD has doubts.

 In pre-election campaigning, both main parties have committed to maintaining the Triple Lock increase on State Pensions. Under this agreement the state pension increases each year by the greater of CPI inflation, average earnings, or 2.5 percent, if higher. However, the OECD has cast doubt on the long-term affordability of maintaining the Triple Lock and, in its 2023 Economic Outlook, instead suggested that state pension increases could be based on the average of CPI inflation and earnings growth.

 In recent years, high levels of inflation and subsequent pay increases have led to bumper increases to the state pension, 10.1 percent in 2023 and 8.5 percent in 2024. The last time that the 2.5 percent minimum increase applied was in the April 2021 state pension increase following the impact of the Covid-19 pandemic on inflation and average earnings.

 If we consider the potential impact of the OECD proposal, illustrated below is how a revised Aon UK DC Tracker would have performed over the past three years. This shows a revised tracker with the dotted line representing if the OECD proposal had applied from the introduction of the single tier state pension in 2016. This is compared to the existing Tracker based on the actual state pension increases applied over the period.

 While the revised Tracker is below the actual Tracker at all points, the gap between the two varies over time and at some points is remarkably narrow. This is particularly so following the Covid-19 pandemic when the Government chose to disregard the increase in average earnings on the basis that the pandemic-driven fluctuations were considered exceptional.

 If the OECD proposal had been applied since 2016, the expected retirement outcomes for our sample savers would be around £375 per year lower for members at 31 March 2024, corresponding to the approximate difference in the Tracker scores at the end of the chart of a little less than one and a half points.

 Matthew Arends, partner and head of UK retirement policy at Aon said: “It is, of course, up to governments to decide on national spending and welfare policy. What our analysis shows, however, is that, if the OECD’s proposal has been adopted since the single tier state pension began in 2016, outcomes for members would have been affected. But the effect is less than you might expect – our sample members’ retirement outcomes are projected to be about £375 a year lower after tax, or approximately £7.20 a week. Having said that, the state pension is of most significance to the lower paid for whom this size of shortfall could make a material difference to their lifestyle.”

 Aon UK DC Tracker – existing vs Tracker with revised state pension
 
 Source: Aon UK DC Pension Tracker (1 January to 31 March 2024)