On the go: Millions of workers face life-changing retirement shortfalls, as lower growth forecasts are set to wipe a third off pot values, according to new research.
The joint report published on Sunday by Interactive Investor and LCP examined the impact of lower annual growth forecasts for equity and bond markets on workplace pensions.
The report highlights that many people paying into defined contribution schemes could be overly optimistic about the rate of growth their retirement pots are likely to benefit from in future.
A poll by Interactive Investor found that one in eight respondents think equity markets will grow by 10 per cent or more each year for the next 30 years.
Falling long-range forecasts for real returns on the money invested in pension funds means workers must contribute half as much more to their pension to receive the same predicted amount, compared with a decade ago, the companies stated.
Figures show that a typical worker on average pay who puts 8 per cent into their pension from age 22 would receive a pension forecast of £85,000 based on growth assumptions in 2017; for a 22-year-old who started work 10 years earlier in 2007, the estimated retirement pot would have been £131,000 — £46,000 higher.
Savers planning to contribute 8 per cent into a pension a decade ago would now need to contribute 12 per cent to achieve the same target pension pot taking account of potentially ‘lower for longer’ returns, the research noted
Figures from the report showed that the average real rate of return for a simple portfolio comprising 60 per cent equities, 20 per cent corporate bonds and 20 per cent government bonds based on the reports published in 2007, 2012 and 2017 has fallen from 4.2 per cent in 2007 to 2.4 per cent in 2017.
Interactive Investor and LCP make a series of recommendations for individual investors, employers and policymakers to urgently address the looming shortfall that could occur if declining growth rate forecasts turn out to be accurate.
Dan Mikulskis, partner at LCP, said: “When we look at our investments, we tend to ask how have they 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.”
He noted that commonly used assumptions currently expect annual returns of around 5-6per cent a year for stock markets over the long term, and much less for bonds.
“But our survey shows that 40 per cent of individuals expect more than this,” Mikulskis added.
Becky O’Connor, head of pensions and savings at Interactive Investor, explained that investment growth could mean the difference between market performance on retirement outcomes may be poorly understood.
She said: “Now we live in a potentially lower growth world, this needs to be reflected by recommendations for higher minimum pension contribution amounts.”
