Steven Leigh, associate partner at Aon, said: “Given the current high inflationary environment, this update to the Retirement Living Standards offers valuable insight to savers. It helps to ensure that the Standards remain relevant to help members answer the difficult question of “how much is enough?” in terms of a retirement saving target.”
“At this time of a rising cost of living and all its knock-on effects, early findings from Aon’s soon to be released ‘DC Today’ pulse survey, help to shed some light on the way schemes and members are responding. The research looks into defined contribution (DC) pension scheme member behaviour and at the ways schemes are looking to help.”
Steven Leigh continued: “Schemes are reporting that more members are reducing or ceasing their pension contributions, and that there is an increase in requests to withdraw funds from DC pots – and at earlier ages than we have seen previously. These behaviours - if continued longer term - could ultimately compound the challenges of higher living costs in retirement.”
Chris Inman, head of DC investment at Aon, said: “There is some light though. The 2022 falls in investment markets and increased inflation mean that the current value of pension funds are generally taking a hit. However, increases in annuity rates for people purchasing a guaranteed pension income and increases in bond yields and future return assumptions, can mean that a smaller pension pot could still deliver the same, or even a higher level of pension income.”
“The data underlying the Retirement Living Standards shows that a smaller DC pot can now provide the new higher levels of required expenditure in retirement. However, there may be a bigger challenge for those coming up to retirement who have not saved enough and for people who are further away from retirement and who are struggling to maintain contributions.”
Grounds for optimism
Steven Leigh said: “Importantly, our research also shows that there is evidence of a positive response from many schemes and sponsoring employers to help support employees through these difficult times. This has been through introducing extra contribution flexibility, enhancing communications, adapting investment design and through additional support for people coming up to retirement. It’s reassuring to see that constructive action is being taken.”
“This action was being taken even before the recent publication of the Pensions Regulator’s (TPR) new guidance which urged trustees to support DC savers amid the current economic challenges - and which we believe will provide another incentive for schemes to take action. While many of the suggested actions in TPR’s new guidance will already be done by DC schemes and trustees, such as monitoring how members’ projected retirement funds have been impacted by recent events, it is a welcome reminder for those yet to consider how best to support members in these trying times.”
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