While the volatility in gilt yields at the start of this year gathered the attention of investors from the perspective of defined benefit schemes, there was less scrutiny of the impact on DC schemes and their members. However, it once again highlighted the need for DC schemes to review their default investment strategy and to consider the support that members receive in the run-up to retirement.
Jit Parekh, partner in the DC team at Aon in the UK, said: “When there is this sort of volatility within the gilt market, there can be strong and potentially irrecoverable consequences from a DC perspective if it coincides with members crystalising their retirement pots. Volatility reduces the certainty of what members might access at their retirement – the money they will need to see them through 30 or more years. Only a minority of DC schemes now operate default investment approaches focused on annuities - in Aon’s Annual DC survey in 2024 it was down to 8 percent, compared to 39 percent in 2017. Other types of defaults may continue to rely heavily on UK gilts - particularly as members approach their retirement.
“Over the last three years, for those with the highest allocations to UK gilts, the maximum loss experienced could have been up to 40 percent if members accessed their savings pot at the ‘wrong’ time. With interest rate sensitivity becoming a key risk to member outcomes as they approach retirement, this really brings into focus the importance of reviewing a scheme’s investment strategy and the need to consider diversification both across and within asset classes. Aon has worked closely with schemes to identify and reduce key risks throughout the member journey, but we also recognise that there are many schemes that are still reliant on long-dated UK gilts as members come up to their retirement date. The risk borne by members crystalising their retirement pots also puts into focus just how important it is to support members in the lead-up to their retirement.
“This is another area where we are actively supporting clients running DC schemes. We help them to put themselves into their members’ shoes by reviewing retirement communications and support - and then take steps to improve or add to this for better decision-making at retirement.”
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