While there are signs of recovery in some financial markets after last year’s economic turmoil, trustees need to stay focused on protecting savers from economic volatility.

Although equities have enjoyed a stronger year to date, bonds have continued to suffer in a climate of rising interest rates and high inflation. Headlines such as “UK gilts tumble again as inflation fear spreads through market” have been common in the press recently, and trustees must take note.

The impact on defined benefit investments appears to have settled. While trustees must remain vigilant, they have acted on our guidance on managing risks in leveraged liability-driven investments. At the same time, we remain determined to ensure trustees do not sleepwalk into a defined contribution (DC) crisis for savers approaching retirement.

We issued a clear message in January that savers must be supported amid concerns the value of some DC pots has fallen. That message remains just as relevant today.

So today I am once again calling on DC trustees to use our guidance to protect savers who are close to retirement and could be impacted depending on the investment strategy of their scheme. These are the savers with the least time to make up losses.

Trustees must act now

In line with their fiduciary duty, trustees need to ensure key requirements are met, including continuing to support savers in so-called ‘lifestyle’ funds, and to ensure investment strategies support stronger saver outcomes in the years to come.

Older savers are being disproportionately impacted as historically lower-risk investments are suffering. Interest rate rises, widely predicted going into 2022, are impacting long-duration bonds, highlighting the need for trustees to ensure their bond investments align with member choices at retirement.

Trustees need to focus primarily on outcomes, not just driving down costs. In pursuit of this, they must ensure they receive good and timely information on performance and risk for different member cohorts, and the attribution of those risks.

They need to ensure their default pre-retirement strategy is targeting the right outcome and is fit for purpose in the current market environment. Trustees are legally required to review their default strategy and the performance of their default arrangement at least every three years, and without delay following any significant change in investment policy.

Continuing to support savers

Increases in the value of equity markets are good news. The projections for younger and mid-career savers are that they should recover their losses sooner rather than later.

However, trustees need to be mindful that these early signs of recovery are unlikely to be fully reflected in the annual benefits statements they will sending to savers in the coming months.

Annual statements are by their nature retrospective, with a gap between the investment performance period and when savers receive their statement. It’s vital that trustees provide more up-to-date context in annual statements and supporting materials.

We expect trustees to guard against the risks of savers making knee-jerk decisions which could harm their retirement plans. The next benefit statement could prove a key turning point for many savers, and trustees need to take action in response.

We urge schemes to engage with savers approaching retirement to review and update their choices. If savers change their mind over the benefits required or about the time when they expect to take them, this could significantly impact their pension pot outcome. Schemes should encourage savers to consider these issues when they see their annual pension statement.

For older savers with larger pots, economic conditions mean that it might take several years or more for recent losses to be recovered. These savers need to think carefully about when and how they might access their pot and be mindful of the risks of cashing out, and the importance of retaining investments which provide longer term growth.

The annual benefit statement cycle is an important opportunity to explain the implications and while trustees cannot give savers financial advice, they should signpost them towards sources of appropriate advice and guidance, notably Pension Wise and MaPS, to improve the chances of savers making good decisions and realising their retirement goals.

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By Louise Davey, Interim Director of Regulatory Policy, Analysis and Advice