The fall of long-range forecasts for real returns on money invested in pension funds will have a significant impact on savers.
A joint report by LCP and Interactive Investor (II) found that workers must contribute twice as much to their pots to get the same predicted sum as a decade ago.
For instance, a typical saver who contributes 8% of their salary from age 22 would receive a pot forecast of £85,000 ($118,114, €97,790), based on calculations in 2017.
But compare this example with 2007 and the forecast would have been £131,000, meaning that a decade ago someone entering the work force would have been £46,000 better off.
LCP and II believe that people now need to contribute 12% into their pension to reach the same target, as they would need to take into account the potential ‘lower for longer’ returns.
Significant differences
For instance, PwC figures show significant shortfalls between 2007 and 2017, where the weighted average rate of return nearly halved in a decade.
| Age | 4.2% return (2007) | 2.4% return (2017) | Difference |
| 40 | £32,433 | £27,442 | -15% |
| 50 | £103,895 | £70,947 | -32% |
| 60 | £131,298 | £84,604 | -36% |
| 70 | £164,077 | £99,595 | -39% |
| 75 | £203,286 | £116,052 | -43% |
The table shows that, by age 75, savers who started contributing in 2007 would have a pot nearly twice as big as their 2017 counterparts.
Becky O’Connor, head of pensions and savings at Interactive Investor, said: “This report highlights the impact of lower forecast investment growth on pension pots and the profound implications for the generations of workers whose retirement pots are fully exposed to the fortunes of global markets, without many even knowing.
“‘Lower for longer’ investment growth could mean the difference between scraping-by and being comfortable in retirement, but the impact of stock market performance on retirement outcomes may be poorly understood.
“Now we live in a potentially lower growth world, this needs to be reflected by recommendations for higher minimum pension contribution amounts.”
Uncertainty
Dan Mikulskis, partner at LCP, said: “When we look at our investments, we tend to ask how they have performed, but the more important question is often how will they perform.
“Future stock market returns are one of the most debated areas in investing. The truth is no-one knows for sure. Commonly used assumptions right now expect annual returns of around 5-6% per annum for stock markets over the long term, and much less for bonds. But our survey shows that 40% of individuals expect more than this.
“We’ve entered an age of responsibility, where more and more people have now become investors, responsible for their own financial security. Looking under the hood of investment products and asking questions like: ‘How much of my assets are invested in stock markets? How much in bonds?’ is vital.
“The industry needs to step up and do better to help investors be realistic here, getting past the jargon and sales guff to actually help produce tools that help savers understand how their money may grow, and the impact of things like inflation and fees over the long term.”
O’Connor added: “Because of the uplift to contributions from tax relief, pensions still make sense over other ways to invest for retirement even in a lower growth world. It’s worth bearing in mind, for example, that headline rates on cash savings accounts do not take into account inflation – if they did, they would show minus figures now – whereas forecast growth rates for pensions usually do reflect inflation.
“But now more of us have defined contribution pensions and will depend on them, thanks to auto-enrolment, we may need to look to put more into them, if that’s possible.
“We also need to take care when using online tools and looking at statements that the investment growth rate assumption being used is realistic. A wildly out-of-kilter growth rate can drastically affect your forecast pot size and in turn, your plans for later life.”
