This is a very curious document which takes more than a little explaining. The upshot is that those saving in DC pensions are no better off, relative to their needs , than they were  in 2020 and considerably less likely to retire comfortably than only a few months ago.

These measures are based on a lot of assumptions about what we want and what we need (not necessarily the same thing).

And they are based on assumptions on what will happen to inflation and investment returns.

We pay actuaries to make these assumptions (guesses) and in as much as anyone is qualified to make educated guesses it is Aon.

What is happening to our DC pension expectations has been put into a graph

What the graph seems to show is that the cost of living updates in 2021 , 2022 and 2023 set back our progress to retirement adequacy.

If we exclude the impact of the changes to the Retirement Living Standards, the Tracker fell from 77.5 to 76.0 due to lower expected future investment returns. But if we allow for the impact of the updated Retirement Living Standards, the Tracker  fell further, to 59.3.

This is unbelievably frightening for DC savers. Their security of tenure falls in a quarter from 77.5% to less than 60% and it’s all because of the cost of living!

Imagine opening your first pay packet to find out that you’re actually being paid 18% less than what you’d expected!

The point of a pension is to provide us with protection against future costs. While DC pensions are – according to Aon, providing us with stable purchasing power to buy an annuity, they are not providing us with no protection against increases in the cost of living.

What does provide us with real protection against the cost of living? The answer to this , regrettably to many, is that most volatile of asset classes – shares in real assets(equities).

When we look more closely at the investments being made on behalf of the people

When projecting the DC pension saver’s pots, members are assumed to be invested in a typical ‘drawdown lifestyle’ fund which reduces the level of investment risk taken as a saver approaches retirement. Members are assumed to be fully invested in growth assets until 15 years before retirement,
at which point investments begin to be transferred into lower risk funds, including bonds.

Future investment returns are assumed to be in line with Aon’s best estimate Capital Market Assumptions for each asset class – these are updated quarterly by Aon’s Global Asset Allocation team.  Investment performance over the previous quarter is taken in line with benchmark index returns for the relevant asset class.

The trouble with a “drawdown lifestyle” is that it does not protect people using equities, it protects by using safe non-volatile assets which keep income levels steady but lose people money in real terms over the long term.

Defined benefit schemes have found that investing in these types of funds has left them short, trusties have had to go back to sponsoring companies and demand deficit contributions. Companies have paid for low volatility assets with highly volatile cash-calls.

We could do the same with DC schemes and there are those who think they should be funded by member and employer at the high rates demanded by DB trustees.

Or we can ask members to be invested in long term assets and accept high levels of volatility to get to where they want to be eventually.

Or we can find a way to get the best of both worlds by providing smoothed inflation linked outcomes at reasonable costs to members and employers.

Aon might argue that this is best done through CDC and indeed it could be. But sadly this is taking a long time to design and there is still no certainty that any more organisations will want to do this on a “for profit” or a “not for profit” basis. The only organisation committed to doing it at all is Royal Mail and it is taking them a long time to get going.

I argue that rather than wait for a market to form, we should make the best with what we’ve got. Aon’s research shows that even when the investment markets are relatively stable, we are at risk of seeing real purchasing power from our pensions fall from 77.5% to less than 60%. That is no security at all!

It is time that we properly addressed this problem. Aon are right, we have little or no security from DC and the way that DC investment options are currently set up for the most of us is wrong. We cannot tell our DC provider to change things – as if they were SIRI on our phone. We need a fundamental reset of the way we get out pensions paid. We need long term investment in real assets (equities) to and through retirement and we need a smoothing mechanism to make sure we don’t see our savings wiped by drawdowns from our funds when markets have crashed.

Whether this is by CDC or by capital backed DB plans (like Pension SuperHaven) is relatively unimportant. What is vital is that we don’t just accept what Aon is saying as the inevitable consequence of DC drawdown pensions and do something about improving matters for the majority of us not able to sort matter for ourselves of buy advice from an expert.