Millions of Britons could be in for a shock at retirement, as lower growth forecasts suggest people are not on track to get anywhere near what they expect in retirement.
A startling report, published by Interactive Investor and consultancy LCP, has warned that unless workers take drastic action to boost their contributions, they could be heading towards a serious shortfall in projected pension income at retirement.
The 19-page report, called 'Is 12% the new 8%?', has warned that up to 10m Britons in defined contribution schemes - where the saver bears all the investment risk themselves - are at risk of not getting anywhere near what they might be led to expect.
According to the report, the lower-for-longer environment of low interest rates, low bond yields and restricted stock market growth means a 22-year-old starting to pay 8 per cent into their DC pension now would receive £46,000 less than a 22-year-old putting 8 per cent into a pension in 2007.
The impact of inflation and charges adds a whole other layer of complexity and the potential for further erosion of expected returns.
The report claimed even if someone put in 12 per cent a year, this would only just allow them to match the sort of income generated by someone who started investing in 2007, based on 2017 growth assumptions.
As the report put it: "A decade of falling returns since  means that simply to stand still relative to those original [growth] assumptions, a minimum 12 per cent would be required."
Based on the Financial Conduct Authority's real rate of return for major types of investments over five-year intervals since auto-enrolment came into effect in 2012, it is clear there has been a significant drop in expected growth, based on a simple portfolio split between equities and bonds (see Table 1).
Table 1: Weighted average real rate of return on an illustrative pension pot based on growth assumptions in a) 2007, b) 2012 and c) 2017.
Weighted average rate of return
Source: LCP; weighted average real rate of return for a portfolio comprising 60% equities, 20% corporate bonds and 20% gilts.
According to Becky O'Connor, head of pensions and savings for Interactive Investor, this would make a significant difference to the expected outcome for people in workplace pensions, based on the age at which they invested.
She said: "Lower-for-longer investment growth could mean the difference between scraping by and being comfortable in retirement, but the effect 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 in recommendations for higher minimum pension contribution amounts." (See Table 2).
Table 2: Size of illustrative pension pot at different ages based on real rate of return of a) 4.2% and b) 2.4%
Dan Mikulskis, partner at LCP, commented that while commonly used assumptions from providers and advisers might expect annual returns of approximately 5 per cent for stock markets over the long-term, and less for bonds, individual investors expect more than this.