Those running UK defined contribution (DC) pension schemes are still too often underestimating the impact of gilt market volatility, Aon has argued, suggesting this could have a “significantly” adverse impact on member outcomes.

Aon said that while the volatility in gilt yields at the start of this year gathered the attention of investors from the perspective of defined benefit (DB) schemes, there was less scrutiny of the impact on DC schemes and their members.

However, the firm said this lack of scrutiny highlighted the need for DC schemes to review their default investment strategy and consider the support that members receive in the run-up to retirement.

Aon partner in the DC team, Jit Parekh, 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 crystallising 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,” he said.

He suggested that a minority of DC schemes now operate default investment approaches focused on annuities, with Aon’s DC survey finding this had fallen to 8 per cent in 2024, compared to 39 per cent in 2017.

Parekh noted that other types of defaults could continue to rely heavily on UK gilts, particularly as members approach 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 per cent if members accessed their savings pot at the ‘wrong’ time,” he continued.

“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.”

Parekh said Aon recognises that many schemes are still reliant on long-dated UK gilts as members come up to their retirement date.

He said that the risk borne by members crystallising their retirement pots also brings into focus how “important” supporting members in the lead-up to their retirement is. 

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