Should DC trustees be worried by the gilt-crash?

Reading Jonathan Stapleton’s measured reporting on the funds used by DC investors in the “pre-retirement phase” I was drawn to some research from Professional Pensions

The scale of the issue

Well-diversified master trust default funds tended to fare better than some.

As an example, NEST’s 2025 Retirement Fund – targeted at those looking to retire in 2025 – saw a fall in unit price from £2.2191 in the week ending 7 January to £2.1253 at 29 July, the latest numbers available, a fall of 4.23% during the period. Its 2023 Retirement Fund fell by 4.01% over the same period.

And, while measured on a different timescale, the £2.7bn B&CE Pre-Retirement Fund – targeted at “members who are approaching retirement and have not yet decided what they want to do with their investments at retirement” – saw a 9.4% fall in value from January to 27 September.

Commenting on the above, B&CE said it acted to reduce the interest rate sensitivity and credit risk of our bond allocation earlier in the year but noted the short-term market environment for both bonds and equities was “challenging and a clear headwind to performance”

Other providers, however, seem to do far worse.

One major insurer’s £1.8bn pre-retirement fund – invested in a mixture of gilts and corporate bond funds and aimed at those targeting annuity purchase – posted a 19.51% loss in the six months to 30 June alone. The same insurer’s option for those targeting drawdown saw an 8.2% fall in the year to the end of June, while its cash fund posted positive performance of 0.31% over the same period.

The worry is not for people who consciously chose their retirement strategy but for the millions who didn’t and are currently sitting on losses of a quarter of their fund.

This tweet is from a retired IT consultant , not a pension expert. Which brings me to the point of this blog. Work I have been doing at AgeWage on the actual returns people receive over a lifetime of saving in workplace pensions consistently shows that those who are older and have bigger pots, get lower returns.

Recent analysis suggests that the scale of this phenomenon changes from scheme to scheme but that pension schemes that use annuity protection as the lifestyle default are delivering markedly worse returns than those whose lifestyles are pointing at cash or drawdown. Put more simply, if you are being transferred into gilts right now, you are in trouble *unless you intent to buy an annuity.

We haven’t run any large data sets this week so I haven’t seen the impact of the gilt-crisis – but I suspect that those in or approaching retirement in a number of occupational and contract based DC arrangements are in for a nasty surprise when they get their next pension statements. Those with on-line capacity may want to look away at this point.

Sooner of later, trustees who are still assuming that their DC members are buying annuities and haven’t reset their lifestyles towards other investment pathways must be feeling a little guilty, perhaps a little worried.

Nico Aspinall, former CIO at People’s pension and now CIO at Connected has written as much

Will the rebrand from “annuity” funds into “pre-retirement” funds have scuppered a number of DC schemes? There will be a huge focus on aligning DC member literature, investment strategies and behaviours in the light of the gilt crash. Well done Jonathan Stapleton for the excellent article below and inspiring this post.

The income on a portfolio of gilts held to maturity hasn’t changed this year or in the last few weeks, but its capital value has tanked as the market has puked a decade’s worth of yield compression up in a few days. Most people are loaded up with gilts in the approach to retirement by default. This will be a painful moment for many.

The worst hit are really “annuity” funds which may be almost exclusively gilts and their racier cousins corporate debt. The value of converting them into an annuity has hardly changed due to markets and we haven’t seen a major uptick in defaults. They are (probably – worth looking closely) doing their job, but is this the job the consumer expected?

Annuity-matching was felt by lawyers to smack too much of guarantees so they were branded as pre-retirement funds. Freedom and choice pushed many other annuity funds to rebranded as annuities were now repressive. Much of the name change didn’t change the content. This could be dangerous. Even if the fund name is right, what does the member booklet, fund factsheet and website say it is meant to be doing?

So now we go into the period of finding out who actually wanted the flexibility of choice but found themselves in an annuity strategy. We will find out because of the complaints of people retiring who didn’t want an annuity. Unfortunately they will have suffered the most.

Things to ask the investment decision-makers, or yourself if you are one:
1. Why is the duration so long for a lump sum retirement?
2. How many people in this fund actually buy an annuity?
3. Is long-dated credit really the most efficient way to generate returns?

In answer to the question in the title, DC trustees would do well to heed Nico’s advice. If they are reporting losses along the lines of Jonathan Stapleton’s research, the situation is manageable, but if retirement savings  are in annuity funds and owned my members not expecting to buy annuities, awkward questions will be asked.

It will be interesting to read this year’s IGC reports on this.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Should DC trustees be worried by the gilt-crash?

  1. con keating says:

    The obvious group who will be hurt are those who were intending to draw down from their funds rather than buy annuities (it will be interesting to watch how rapidly annuity yields respond to market changes) It will also of course reduce the size of lump sums available at retirement.
    This has been phrased in terms of those approaching retirement – for those already drawing down from their funds, there is little choice but to accept lower pensions.

  2. DaveC says:

    The costs of a decade of artificial ‘prosperity’ finally begin to show… I fear where it will finally end.

    With regards the tweet, I’m a little baffled why you’d ‘move to safety’ if you have DC savings at retirement, unless you had a plan beyond the usual approach?

    Isn’t the current idea that you take your DC pot and then invest it for an income? Why would you have moved to bond/guilt/treasury type investments at record low interest rates?
    Isn’t the only thing they were guaranteeing a negative real yield (very slightly higher than cash in the bank), and a huge risk if interest rates ever came back to historical norms?

    Is this a pension provider just following some old legacy logic and making some really terrible default decisions?

    Well the 10yr Gilt seems to suggest the BofE can’t project for toffee. Is there anything that they’re good at? Or even competent at?

    Thanks for your continued great articles Henry!

  3. Tim Simpson says:

    Hello Henry,
    The ‘gilt crash’
    In today’s Metro, Crispin Odey (the Chancellor’s former boss) has an alternative view. That is: Gilts are the gift that keep on giving. He denies that his reported generosity to the Tories of £1.7m has handed him a trading advantage…!
    Kind regards,
    Tim Simpson

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