The impossible choices facing savers when they get to retirement; this from LifeSight’s chair’s statement(2025)

These are the nine options presented by one of our DC pension schemes, WTW’s LifeSight.

The individual is faced with these choices and with lower risk options trending towards high investment in Government Gilts and Corporate Bonds. This is state of the art stuff for DC schemes but makes little sense to me.

I have been trying to understand how the instability in Governments around the world is bad news for those who hold debt as an investment. I have come to the conclusion that bonds and especially Government bonds are a bad long-term investment.

Fixed interest does not mean fixed growth.

One of the people I spoke with to understand this is Patrick Tooher, consultant City Editor of the Mail who sees finance through the eyes of consumers. Here he is this morning explaining the impact the trader’s bets on political chaos in the UK are having on our finances.

Britain increasingly depends on foreign investors to pay its way in the world, with more than a quarter of its national debt held abroad.

They lend to the Government to fund the gap between what it spends and what it raises in taxes.

But, crucially, Britain also runs a trade deficit – where imports exceed exports – which puts extra downward pressure on the pound because the UK must sell sterling to buy foreign currency to pay for imported goods and services.

‘We are reliant on the kindness of strangers, so any sell-off in gilts would be likely to take the pound lower,’

said Jane Foley at investment bank Rabobank.

The last time bonds and sterling fell in tandem was following the disastrous Liz Truss mini-Budget in 2022 when hidden borrowing was exposed in parts of the pension system that led to a Bank of England bailout of the sector.

This cannot be said too often, a reliance on gilts to protect our retirement  is wrong, the way to protect ourselves over time is by investing in growth assets, the less we have to corporate and Government debt the better. That’s where CDC’s edge is. Though CDC will hold some bonds to make sure its oldest members are paid if young savers dry up, it is a “growth only” pensions as I have to remind myself with Derek Benstead’s diagram

The reality of closing DB schemes and relying on annuities (which DC schemes ultimately need to do to pay income) is to rely on gilts and bonds. The alternative is to shut up shop and sell to an insurer (DB) or rely on market timing (DC). The only way to avoid annuitisation and reliance on these “fixed interest” instruments (bonds and gilts) is to stay open and invest for growth.

The more that our Government gets into debt, the worse for the value of our Government debt (gilts) and that has knock on impact to corporate debt.

Government borrowing costs are even higher now, though they have not risen as fast as four years ago, while sterling is well above the near-parity it briefly sank to against the dollar back then.

The bond sell-off has also hit the value of millions of workplace pensions, especially for those approaching retirement who are automatically ‘de-risked’ into supposedly safe ‘lifestyle’ funds that mainly invest in bonds and other fixed income investments.

‘If you own bonds in your pension or elsewhere you will find their value has fallen significantly – by 20 per cent in the past few days for some gilts – and there’s no upside,’ said industry expert Henry Tapper.

I don’t want to be a Job but for those who are holding cash and bonds in DC , typically those close to retirement, their gilt and corporate bond holdings are crashing in value.   Unless people want to buy annuities (which may be the best thing to do right now) they will have a problem drawing an income from a “de-risked” fund.

There is of course a way for DC to move to CDC. It is called Retirement CDC and it may be available to those who want a pension from their workplace pension from late 2028 or early 2029. But that could be too late for many of us. CDC provides some stability from being collective but it requires people to swap bond heavy lifestyled DC funds for a growth based fund they should have been in all along.

WTW says it wants to scrap all the complexity, illustrated at the top of this blog, and replace it by Retirement CDC. This strategy while better late than never will be too late for many people who have been “de-risked”! #

Here are you options from Willis Towers Watson once again. These are an encyclopedia of default choices for DC investors. No wonder WTW are arguing for Retirement CDC but why people should wait is beyond me!

I’m arguing that the place to be is in a collective pension where young and old are in one fund with an infinite time horizon. That means no de-risking in the years leading up to retirement (lifestyle as it’s called) and no lifestyling to fix the fund in an annuity “ever”. It means little to no exposure to the political crisis’ we’re having now and had in 2022. There will be crisis’ in growth funds but in the long-term but growth is what pension funds need to stay open and pay inflation linked pensions. The way to stay open and invest in long-term growth is to share risks ad that is what CDC does.

If you don’t believe me, read LCP’s recent work on the resilience of growth within CDC and how in survives the crisis’ we get in a way that closed DB and DC simply cannot.

The one “arrangement” that has failed to protect us is DC workplace pensions. If you get stuck in a lifestyled fund and on your own , you are vulnerable to every political risk!