UK
London, 31 August 2010

Cheaper annuity rates and considerable improvements in equity markets mean the retirement outlook for members of defined contribution (DC) pensions have significantly improved compared to only a few months ago, according to calculations from Mercer. Mercer’s “DC Barometer” shows how changes in annuity and investment markets, as well as contribution levels, can influence the expected retirement age and income of DC pension scheme members.

Comparing annuity price movements and stock market conditions at the end of May 2010 with the end of July 2010, Mercer’s barometer shows that a sample scheme member planning for retirement can work 7 months less and still retire on the same income they expected based on conditions two months ago.

Steve Charlton, a Senior DC Consultant at Mercer, commented: “This considerable difference month on month shows what challenges and uncertainties DC members face. Exceptional market conditions such as those experienced in May and June can have an enormous detrimental impact on the pension income of DC members that are close to retirement. Yet, a swing in annuity rates, as observed in July, can have a significant positive effect.

“Our calculations show the projected retirement age of members fluctuating by as much as 30 months since the end of 2009. This highlights how important it is that members monitor their pension pot and consider the impact that future changes in market conditions could have on their retirement plans.”

Mr Charlton explained: “A fall in equity markets of 5% would lead to our sample member needing to work another 5 months for the same level of income in retirement. Individuals who cannot afford to retire if their projected retirement income is reduced will need to be flexible around the timing of their retirement.”

Notes for Editors
The DC Barometer looks at the impact of the movement in annuity rates, investment markets and contribution rates and is a measure of the pressure being exerted on DC savings as well as members’ ability to afford to retire when they plan to. The information is used to illustrate how a member’s plans for retirement might improve or worsen over time. The example used in this release is a member in his/her 50’s, with combined annual employee and employer contributions of 12 percent of salary (Mercer’s 2009 DC survey showed the average combined contribution level to be 11.9 percent) and an existing pension pot of £200k at December 2008.

The Barometer illustrates the months or years fewer or longer that a member might have to work in order to achieve a desired retirement income. This will vary by member age and estimated accumulated DC savings. All of the assumptions are Mercer’s own and are used for illustration purposes only.