Trustees need to take action to support members in poor performing pre-retirement funds as market volatility worsens

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LCP is warning that many members will be shocked to see the value of their retirement savings plummet, due to poor performing investment strategies geared towards annuities. Members are unlikely to appreciate that annuity rates have moved in the opposite direction. However, that only helps those intending to buy an annuity.  

While many schemes have moved away from annuity focused targets in the wake of the 2014 pension freedom reforms, annuity investment strategies have consistently remained in place in DC pension scheme design as an option for members or as a legacy default. Investment strategy designs for this tends to use a fund that aims to match the changes in annuity rates and usually includes a mix of long-dates gilts and bonds. While the rationale behind linking these funds to annuity rates is to reduce risk as people approach retirement, due to their allocation market volatility has wiped off more than a third of their value since December 2021. This has been exacerbated in the last few days with heightened volatility following the market reaction to the Chancellor’s Budget.  

For members opting for annuities, analysis shows that their outcome is likely to have improved over the period, given the typical 25% cash holding. Conversely, values will have plummeted for those who are close to retirement and planning to take cash or move into drawdown and they will have little time to recoup their losses.  

Stephen Budge, Partner at LCP, commented: “Our initial concern is that members will just focus on the sharp decline in their pot values at a critical point in their retirement journey. The bigger concern is if the member is in the wrong investment strategy. We know that schemes are already seeing an rise in the number of member complaints and concerns.  

“Communication is key and schemes should be proactively raising awareness of this issue with their members. They need to be reassuring those opting for an annuity that they are on the right track and checking with others that they are in the correct investment strategy in line with their retirement goals. Signposting members to MoneyHelper and Pension Wise is also a good way to make sure that members can get free and impartial advice.”