The UK’s combined defined contribution (DC) pension stood at £489 billion at the end of October, down by £18billion from September, according to Aon Consulting, the leading employee risk and benefits management firm.
This is the biggest fall since February, and follows a period of rallying DC assets as a result of stock market increases. However on a more positive note, earlier in the month combined DC pension assets reached a 16 month high of £520billion, a level not seen since June 2008.
Aon’s monthly DC Pension Tracker measures the total asset value of UK workers’ DC pension accounts. It also tracks the income in retirement of individuals at different ages who contribute 10% of a £25,000 salary to a DC arrangement and have an existing fund (valued as at September 2007) of £15,000 for age 30 and £150,000 for ages 55 and above.
Highlighting the current uncertainty being faced by UK workers as a result of equity market volatility, a 65 year old retiring on 31st October 2009 would receive an annual retirement income of £8,593. If the same worker had retired six months earlier (30 April 2009), they would have only received £7,133. This is the equivalent of over £120 every month, or £29,200 over the course of 20 years.
Richard Strachan, senior consultant at Aon Consulting commented: “While October finished slightly down compared to September, the general trend for the UK’s DC pension savings is on the up. There is still significant volatility, though, and it is vital for workers to take an active interest in their retirement savings, evaluating whether they are invested in the right funds for them, and to have some very clear goals and a strategy to achieve them.”
Flight to Perceived Safety
According to separate research from Aon, British workers are increasingly investing their DC pensions in their scheme’s default fund, potentially as a result of the continued uncertainty in investment markets. The 2009 Aon Benefits and Trends Survey, which polled 650 companies across 13 sectors, revealed that the majority of employers are seeing more than 80% of their employees invested in the default fund.
Strachan continued: “In turbulent economic times, it’s understandable that members are seeing the default fund as a safe haven. However, the security of the default fund is down to those managing the scheme. To ensure that members are getting the cautious investment option they think they are, scheme investment, and the performance of default funds in particular, should be a priority for those running DC pensions.”
“There is a trend towards increasing the number of investment options; however, too much choice will often lead employees to select the default option through fear or inertia. Employers and trustees need to ensure that they offer an optimal number of investment choices.
The key point is that employers and trustees must clearly communicate the options available if members are to make informed decisions that are right for their circumstances.”
