Pension trustees ‘should guard against savers making knee-jerk decisions’

Pension trustees should guard against the risks of savers making knee-jerk decisions which could harm their retirement plans, according to a boss at a regulator.

They should provide up-to-date context in annual statements, Louise Davey, director of regulatory policy, analysis and advice at The Pensions Regulator (TPR), said.

She also highlighted issues around savers approaching retirement, who have “the least time” to make up any losses to their pension following recent volatility.

Writing in a blog on TPR’s website, she said: “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.”

Ms Davey urged schemes to engage with savers approaching retirement to review and update their choices.

She said: “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.”

Concerns were raised around defined benefit (DB) pension schemes last autumn, after shockwaves were sent through the market following the September mini-budget. DB pensions promise savers a certain level of payout when they retire, based on their salary.

Ms Davey said: “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.”

She added: “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.”

Unlike people with a DB pension, savers with DC pension pots bear the risks around how much income they will end up with in retirement.

Ms Davey wrote: “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.”

She continued: “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.”

The projections for younger and mid-career savers are that they should recover their losses “sooner rather than later”, she said.

But she cautioned: “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 (be) 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.”

Speaking at an event on Monday at the offices of advisory firm Lane Clark & Peacock (LCP), Pensions Minister Laura Trott said savers “deserve confidence to know their pension scheme is working for them and will deliver the best possible retirement outcomes”.

Ms Trott said: “I want to be clear that where schemes are not delivering for pension savers, they need to improve, consolidate or exit the market. I am confident this will help boost the returns of pension savers.”

She said she would like to see trustees of schemes focusing on ensuring their investment strategies and portfolios “are innovative, with effective diversification, and most importantly, targeting the best net returns for savers”.

Ms Trott added: “Together, I’m sure that we can boost returns for pension savers and ensure people across the country are able to enjoy the retirement that they have worked so hard for.”