ALEXANDER FORBES NATIONAL PENSION INDEX
The Alexander Forbes National Pension Index value has dropped by 4.2% to 63.2, down from 67.4 in the six months from March 2011 and down from a base of 100 at the start of the Millennium. This means that the average British private sector worker saving in a defined contribution (DC) pension scheme has lost a further £1,300 per annum of their future retirement income in the last six months of 2011.
The Alexander Forbes National Pension Index shows that while the average 30 year old in 2000 could have expected contributions of around 12% of salary to be enough to provide a two-thirds income (67%) in retirement at age 65, that same saver would now be expecting an income just 43% of final salary, down from 45% in March 2011.
To get back on track, the typical investor (now 41.5 years of age) would be required to invest 38% of final salary, up from 33% in March 2011. Office for National Statistics (ONS) data shows that the average total (employer and employee) contribution rate is just 8 – 12% of final salary, dependent on the size of the scheme, which is 66% of the original savings rates and just 21% of the rate currently required to restore expectations.
The pattern of pension income expectations is similar for other age groups. For typical DC pension scheme members aiming for 2/3rds of final salary at the turn of the Millennium, their expectations are as follows:
| Age in September 2000 (2011) |
Typical pension shortfall p.a. (%) |
Typical annual pension contribution to make up shortfall |
| 50.5 (61.5) |
£13,107 (44%) |
295% of future salaries |
| 40.5 (51.5) |
£14,704 (43%) |
75% of future salaries |
| 30.5 (41.5) |
£11,502 (36%) |
38% of future salaries |
| 20.5 (31.5) |
£9,252 (32%) |
23% of future salaries |
Alan Carey, Principal Consultant, Alexander Forbes Consultants & Actuaries said:
“The last six months of 2011 have been dire for DC pension savers, a combination of falling growth asset values, reduced bond yields and ever increasing longevity have combined to further reduce the value of workers’ pension savings.
“Despite the experience of the last six months, DC pension saving remains an intrinsically effective way to save for retirement. The most important message for DC savers from the index is the importance of reviewing their projected income regularly, rather than assume that assumptions made about pension savings many years ago still hold true today, as in all likelihood they will not.”
Adam and Ben Brown – the importance of regular pension savings reviews
To help pension savers understand the value of regularly reviewing their DC pension savings. Alexander Forbes has created two fictional pension savers - Adam Brown and Ben Brown - and will track their pension savings experience over the coming years.
Both Adam and Ben started work on 1 March 2011, aged 20 on a salary of £25,000. Both entered their employer’s DC pension scheme on the same day and both contributed 16.2% of their salary into their pension, as recommended by their employer’s pension adviser. Both are hoping to retire age 65 on two-thirds (67%) of final salary.
Since that date Adam has reviewed his pension contribution quarterly, in line with the pension adviser’s advice. Ben, however, has ignored his pension, and left his contribution unchanged. After six months’ of savings a gap is already opening in their retirement income expectations.
| |
Contribution March 2011 |
Contribution review, June 2011 |
Contribution review, September 2011 |
Target retirement income |
Expected retirement income |
| Adam Brown |
16.2% of salary |
17.1% of salary |
18.5% of salary |
67% |
67% (£16,750) |
| Ben Brown |
16.2% of salary |
unchanged |
unchanged |
67% |
62% (£15,500) |
Steve Watson, Head of Delivery, Defined Contributions and Benefits, Alexander Forbes Consultants & Actuaries says:
“I cannot overemphasise the importance of people regularly reviewing their DC pension savings. By making relatively small changes to their contributions on a regular basis they can stay on track for a comfortable retirement, but any delay means that their original retirement expectations will quickly become out of reach.
“People will have to have made an unusually large increase in their pension contributions over the last six months to stay on track, due to falling growth asset values and decimated bond yields – but in the long-term it is far better to stay on track with pension savings, rather than face the prospect of an impoverished retirement.”
Background to the Alexander Forbes National Pension Index
The Alexander Forbes National Pension Index aims to make people as aware of the value of their defined contribution (DC) pension savings as House Price Indices have made homeowners aware of the value of their property. Launched in March 2011, the Index is updated and published every six months in March and September.
The construction of the Alexander Forbes National Pension Index is holistic, including State Benefit expectations and allowing for past accrued benefits, bringing all sources of pension revenue into the equation. For a given member, the Index tracks the progression of the DC fund against expectations and takes into account changes in market annuity rates. Alexander Forbes intends to release indicative data for typical members at various ages on a regular basis, to aid the general understanding of how changes market conditions are likely to affect retirement income.