Recent market volatility has prompted calls for defined contribution (DC) pension scheme trustees to take action to support members in poor performing pre-retirement funds.

LCP warned that many members could be shocked to see the value of their retirement savings "plummet" following recent market movements, with many unlikely to appreciate that annuity rates have moved in the opposite direction.

It pointed out that annuity investment strategies have consistently remained in place in DC pension scheme design and, due to their allocation, have seen more than a third of their value wiped since December 2022 as a result of market volatility.

This has also been further exacerbated amid the heightened volatility following the Chancellor’s Budget, with LCP warning that 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.

However, analysis from LCP also found that members opting for annuities will likely have seen improvements in their outcome is likely to have improved over the period, given the typical 25 per cent cash holding.

LCP partner, Stephen Budge, 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 a 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.”

In contrast, the recent market volatility is thought to have improved most defined benefit (DB) pension schemes' funding levels.

The latest analysis of FTSE100 pension positions by LCP’s Pensions Explorer revealed that the combined estimated IAS19 surplus has grown by over £30bn over the three months to 30 September and currently stands at over £160bn, while IAS19 discount rates are currently over 5 per cent pa, the highest month end for over a decade.

Despite the funding improvements, LCP warned that there are important questions for scheme sponsors to consider.

In particular, it suggested that the short-term focus should be on ensuring that pension schemes investments can withstand the current market volatility and they maintain sufficient liquidity to support their hedging levels.

Looking further ahead, however, LCP said that companies should review their long-term term strategy for the pension scheme given the new economic environment, arguing that sponsors need to be proactive and not miss opportunities to reduce costs or risk.

LCP partner, Jonathan Griffith, stated: “This is an eye-watering figure and highlights that pension schemes are entering new territory and companies need a change in mindset when it comes to pensions.

“However, as the current market volatility shows, whilst the surplus highlights a strong position – it is not the only measure for companies and trustees to pay attention to. Levels of risk and liquidity must also be controlled.

“Organisations need to engage with their schemes and work out whether now is the time to free up cash to invest in their business and improve resilience in the face of the economic headwinds in the shape of market volatility, rising inflation, and hikes in interest rates.”

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