For immediate release    Launch of Aon DC Pension Tracker

LONDON, 19 February 2009 – Britain’s defined contribution (DC) pension assets have lost 25% of their value - £140 billion - since the credit crunch began to bite, according to the new Aon DC Pension Tracker, launched today by Aon Consulting, the leading employee risk and benefits management firm. The DC Pension Tracker is the first research tool of its kind to provide a realistic gauge of how the nation’s DC pension account, into which over 3.7 million UK workers pay every month, is faring. 

The Aon DC Pension Tracker does two things: it tracks the change in size of the British DC pension market; and calculates the expected pension income at retirement for people of different ages. The research shows that at the early stages of the credit crunch in September 2007, the value of DC pension assets stood at £550 billion. However, sixteen months on at the end of January 2009, the value had been slashed by over a third (25%) to £410 billion.

DC pensions are an increasingly popular option for employers, with the business paying a fixed contribution into the employees’ pension account, rather than promising a defined level of pension.  The employee may also be required to make a contribution. Such pensions are mainly invested in equities until shortly before retirement when investments are normally switched into bonds and cash, so their course closely tracks the stock markets’ performances.

Huge falls in equity markets have been highly damaging for pensions, but with varying degrees, depending on the age of the employee.

A 60 year old paying total contributions of 10% of their £25,000 salary and expecting to retire in five years time has seen their total projected pension fall by 36%, meaning they can now expect to receive £10,900 annually for the rest of their life, compared to the £17,100 forecast in September 2007.  With little time to recoup their pension’s savings before retirement, this is bad news.

By contrast, the impact on much younger workers is not so severe. A 30 year old employee over this same period of time has seen their projected pension fall by 8.5%, as the effect of the current economic crisis is tempered by future contributions and the long period of time over which the pension assets still have to grow.

Tracking the falls

The graph below demonstrates the changes in workers’ pensions between September 2007 and January 2009, depending on age and assuming 100% of the pensions are invested in equities (as is typical). From a starting point of £10,000 in September 2007, the Tracker shows what it would be worth at the end of January 2009.

Employees urged to review pension saving

On further analysis, the Tracker paints a picture of how different age brackets have been affected by the credit crunch:

Approaching retirement (55-65 years old): 30% to 36% drop in pension account
This fall in pension assets is undoubtedly bad news for anyone approaching retirement that had not started switching their investments away from equities and into bonds and cash.  However, by taking the open market option, people can obtain an annuity that might be up to 30% higher than that offered as a default by their pension provider. Although this group may not have planned to retire later, legislation does currently allow people to retire on a flexible basis and it is recommended that people look at all the options to ensure they make their retirement as comfortable as possible.

Retirement looming but not imminent (40-55 years old): 20% to 30% drop in pension account

For those people for whom retirement is looming but not imminent, the best advice is to review their risk profile to determine the best mechanism for investing pension funds for the future. The benefits offered by a ‘life styling’ approach may now be more apparent and it is not too late to think about the target age of retirement and the strategy of gradually switching automatically out of equities and into cash and bonds over a period of time, say seven years.

Retirement just a speck on the horizon (18 – 40 years old): zero to 20% drop in pension account
If retirement is still just a speck on the horizon, then now is not the time to panic and this group of pensions investors should hold tight and take measured decisions on how much to contribute and what asset classes are likely to deliver the best return in the longer term.  Crystallising losses by switching out of equities or stopping pension contributions will not help in building up a meaningful pension.

Helen Dowsey, principal at Aon Consulting comments: “Over the last year, DC pension scheme savers have been hit hard by the falls in equity markets, and people need to take an active role in reviewing their pensions.

“For some workers, not making active investment decisions could mean they lose out on up to a third of the value of their pension. There is a widely held misperception, perhaps borne out of discussions around final salary pension schemes, that pension values are guaranteed. In reality, the level of contributions paid in, the real investment return received and the annuity rates prevalent at retirement, all affect DC pension accounts.

“We have seen some exceptional falls since the onset of the credit crunch and we urge both employers and employees to maintain the long-term view that pensions are the best way to save for retirement.”

ENDS

For more information contact
Susie Patterson / Leo Wood
0207 269 7233 / 137
susie.patterson@fd.com / leo.wood@fd.com

David Skapinker
020 7505 7478
david.skapinker@aon.co.uk

Notes to editors

About Aon Consulting’s DC Pension Tracker
The DC Pension Tracker provides a realistic gauge of how the British DC pension market is faring by examining how the wider economy is impacting on the pensions of average workers.

The new research tool does two things:

1. Tracks the change in size of the British DC pension market
2. Calculates the expected pension income at retirement for individuals. This is based both on assumptions for future investment return and inflation as well as taking into account the actual changes in investment performance and annuity rates.

The DC Pension Tracker examines the changes in workers’ pensions between the start of the credit crunch in September 2007 and the end of January 2009, depending on different age groups and assuming 100% of the pensions are invested in equities. From a starting point of £10,000 in September 2007 for all the age brackets, the Tracker shows what this would be worth at the end of January 2009.

Background information about DC pensions
According to the NAPF Annual Survey 2008, the average employer contribution is 7.3% and the average employee contribution is 4.4% of pensionable pay. 80% of open private sector pension schemes are DC based.

About Aon Consulting
Aon Consulting Worldwide is among the top global human capital consulting firms, with 2008 revenues of $1.358 billion and more than 6,300 professionals in 117 offices worldwide. Aon Consulting works with organizations to improve business performance and shape the workplace of the future through employee benefits, talent management and rewards strategies and solutions. Aon Consulting was named the best employee benefit consulting firm by the readers of Business Insurance magazine in 2006, 2007 and 2008.  For more information on Aon, please visit www.aon.mediaroom.com.

Safe Harbour Statement: http://aon.mediaroom.com/index.php?s=67

Aon Limited is authorised and regulated by the Financial Services Authority in respect of insurance mediation activities only.