Introduction
This statement is for trustees of defined contribution (DC) schemes and their advisers. It sets out the main points on how schemes should communicate and support savers through this period. Also, how trustees can strengthen the governance and oversight of DC schemes and ensure their investment strategies support stronger saver outcomes.
Many of the key messages are taken from our code of practice, and guidance on investment governance and communicating and reporting.
It builds on an earlier statement (managing investment and liquidity risk in the current economic climate), which focused on the issues we expect trustees to consider when managing investment and liquidity risks in the face of current market conditions. As DC schemes do not involve leverage in their investment strategies, they have not been affected by the issues facing liability driven investment (LDI) funds. Even so, DC savers are not immune to market events. Significant market volatility from both equities and falling bond values (yields have been rising which corresponds to a fall in bond values), along with increases in inflation and interest rates, has affected those accessing their pension savings.
The impact of current market conditions on DC savers
The impact on DC savers will be felt differently depending on their allocation to bonds, where they are in their retirement journey, and how they plan to access their pension savings.
For DC savers who are in an accumulation phase and still a long way from retirement, the impact of the current economic environment is less of an issue. As pensions are a long-term investment and there is time for any immediate losses to be regained without crystallisation. However, those savers will still need to be given reassurance.
For those closer to retirement the impact could be more relevant, depending on the investment strategy being followed.
Different schemes have different investment approaches within their default funds, with the asset mix often changing (usually called ‘lifestyle strategy’) as savers get closer to accessing their pension savings. DC savers tend to have a much higher allocation to bonds as they approach their expected retirement date. This shift in asset allocation may be introduced as early as between 5 and 15 years before retirement. This means that some savers are likely to have seen a greater fall in the value of their DC savings than others.
These falls may be compensated for, at least in part, by improved annuity rates brought about by higher yields; however, annuity products are less favoured by savers in recent times.
Most savers approaching retirement will typically have a mix of defined benefit (DB) and DC benefits, together with their state pension, which may give them flexibility on how they use their DC savings. However, against the backdrop of cost of living challenges, the expected fall in values will be keenly felt by some.
It is important, that those savers close to retirement are supported to understand the implications and cautioned against making hasty decisions. As this might lead to poorer outcomes and in some cases leave them open to scammers.
Our expectations – review your governance and investment arrangements
Review your governance structure
Trustees should follow the requirements of the DC code and review whether their current governance structures are suitable. Looking at how investment risks are assessed, and investment decisions made, they should consider whether their scheme has sufficient scale, time and resource to govern the DC arrangements effectively. Particularly for hybrid schemes, given recent DB challenges experienced around accessing liquidity to meet collateral calls.
Review your investment advisers’ remit
Trustees should check their investment advisers’ remit to make sure the focus is on delivering good saver outcomes rather than solely concentrating on costs and charges.
Trustees are obliged to set their investment advisers strategic investment objectives. We are responsible for checking trustee compliance against these requirements. We have updated our guidance for trustees in setting objectives for their investment consultants to help trustees comply.
We expect trustees to regularly carry out a detailed review of their investment advisers’ performance and to tackle any performance issues or remit omissions arising from the review. Proactive investment advice is important for scheme outcomes. We recommend that trustees review the extent to which proactive investment advice is allowed for in the investment advisers remit, delivered and acted on in practice.
Review the characteristics of your scheme’s saver profiles
How savers make decisions and why they make them is important, as this should influence the design and implementation of the scheme. Trustees need to ensure they understand their savers’ characteristics, such as: age profile, saver type, pot size, their socio-economic demographic; as well as information on how and when savers are accessing (or planning to access) their benefits. Accurate information could lead to better scheme design and member outcomes, our guide on DC investment governance (Designing investment arrangements section) explains how this can be achieved.
Gather and analyse changes in saver behaviour
Your administration team is likely to hold a range of data, which along with publicly available data, can be turned into rich and actionable insights on the behaviour and needs of your savers, the popularity of options and how recent economic conditions have changed those. This information can be used to set demographic assumptions, assess member options, and enable you to enhance decision-making and target actions to get your savers the best outcomes.
Review your scheme’s investment arrangements and implementation
Trustee boards are legally required to review both their default strategy and the performance of their default arrangement, at least every three years and without delay following any significant change in investment policy.
Through the investment governance module of our code of practice, we expect trustee boards to provide a suitable range of self-select investment funds for those savers who do not wish to invest in the default arrangement. This is to make sure that funds remain relevant to members’ (which we refer to as savers) objectives.
The current market environment could change the outlook for different kinds of investments, creating additional investment risks and opportunities. Trustees may wish to ask their investment adviser to carry out a strategy review considering the current market conditions to ensure the investment arrangements and the outcome they are targeting remain suitable.
For some DC master trusts, where participating employers are separately advised by their own investment adviser, trustees should get confirmation from those advisers that their current investment strategies and the design of the default fund(s) remains suitable.
Monitor fund performance and member impact
Trustees are expected to monitor and regularly review individual funds’ performance, not just against objectives, but also considering a range of different and changing market conditions. It is also important to consider how fund performance impacts different members or groups of members, for both default and self-select investment funds, against their performance objectives and industry benchmarks, for example, fund performance for members approaching retirement.
Review the risk of cash investments and other investments that may not protect DC savings from high inflation
Trustees should review how well their current investment holdings protect savers from high inflation.
At this time, cash funds can be perceived by savers to be a ‘safer’ performing investment against other options. However, after adjusting for current high inflation rates, the real return on cash after fees is negative, and for some ‘cash’ investments substantially so. Trustees should ensure their savers better understand the risk of choosing cash investments and the value of considering investments which provide long-term inflation protection.
Some default strategies build up material allocations to cash for their savers as they approach retirement. Trustees should review their objectives with advisers for those cash holdings, including how the cash investment is implemented and their expectations for the cash funds’ performance, to assess whether they remain suitable in the current inflation environment.
Our expectations – supporting your savers
Trustees should review and strengthen their member support capability and target efforts towards those most affected and in need of help. Member insights can be provided by your administrator and used to develop and shape those plans as well as providing you with intelligence on changing patterns of saver behaviour, for example, rates of decreasing contributions and opt-outs. Schemes should look to develop their management information to reflect the needs arising from the cost of living challenges faced by their members.
Review communications to savers
Trustees should ensure savers have enough information to make informed decisions about their savings. You may need to provide this, even if it’s not required by law, to go with their annual benefit statement.
Saver decision-making will be influenced not only by the range of options available, but also by how they are described. Those descriptions need to be sensitive to changing market conditions and changing perspectives on risk. Especially for those who self-select funds and those looking to access their pension savings.
Review the level of support being given to savers
For many savers, the first time they make an active decision about their pension will be as they approach, or even at retirement. They have a great deal of flexibility over how and when they redeem their savings. Helping savers to make better decisions, signposting them to approved advice, or appropriate decumulation options can lead to better member outcomes.
As standard, you should:
- give members a copy of the MoneyHelper leaflet your pension: your choices or similar information
- signpost them to free, balanced and objective tools, such as the MoneyHelper pension calculator
- encourage them to take up free guidance services offered by MoneyHelper or Pension Wise guidance
Supplement these with your own additional guidance, support and modelling tools as appropriate to the circumstances being faced by affected savers.
Our expectations – communicating with savers
Communicate with savers and get them to engage. Managing their expectations is critical to ensuring better outcomes.
Help savers understand what a fall in their DC pension means for them given their personal circumstances
This depends on where savers are in their pensions journey and their investment strategy. What matters for most is how their pension investments perform over the long term. Even for some close to retirement, a fall in value may not be a concern depending on when and how they propose to withdraw their pension. Where that is the case, savers will still need some reassurance.
But given the significant movements in the market, trustees should act now to ensure member expectations are better aligned with where they are invested. This is particularly true for those approaching retirement, or close to the point where they can withdraw some cash from their pension pot. At the same time, provide comfort that there are some actions they can take as highlighted in this statement.
Encourage your savers to communicate or update their retirement plans, including when and how they wish to take their benefits
Trustees should highlight to savers the importance of updating them on any changes to their retirement expectations. Specifically, if they change their mind over the form and shape of the benefits required from their DC pension pot, or about the time when they want to take it, as this could impact their pension pot outcome.
Ideally, these pension and retirement plans should be known before savers are defaulted into lifestyle, or de-risking investment strategies. They should be regularly updated to reflect their investment choices, or strategies they are defaulted into, to suit their confirmed or updated needs. But we recognise the challenge faced by schemes in encouraging savers to engage with their pensions in this way.
Schemes will take their own decisions on when and how this is achieved. It’s best practice to encourage savers to think of these issues across their different pension benefits, when they see their annual pension statement.
Encourage savers to seek guidance or take advice and not to make hasty decisions. Continue warning them about the risk from scammers
Pensions are long-term savings. It is important that savers do not make hasty decisions based on short-term volatility. Making rash decisions like moving everything to cash or redeeming pension savings to try and time the market, could be particularly harmful in the current high inflationary environment. Guide them through the trade-offs that they need to make, and the risks that face them.
Encourage savers to take free, impartial guidance from MoneyHelper before making any major decisions. For those aged 50 or over with a DC pension that want to understand their options, a free Pension Wise appointment may be more appropriate for them. If your scheme provides access to guidance services, remind your savers of this offer.
The rising cost of living combined with falling pension values, may lead to some savers not only accessing cash from their pension pot to pay for essential bills, but also lead them to pause or stop their pension contributions. We strongly promote the importance of saving into a pension and we urge savers to maintain their pension contributions. For some, stopping contributions could have a serious impact on retirement living standards. You should work with employers to support savers to understand the implications of opting out or ceasing contributions, and subsequently prompt savers to re-join schemes when they have done so. Those savers worried about their financial situation should be referred to the government backed MoneyHelper service which can help them manage their money in uncertain times.
It’s also important for savers to be aware of the risks from pension and investment scams, especially in times of heightened uncertainty. Continue to educate them on how to spot the warning signs and to check that they are dealing with a legitimate firm by visiting the FCA Scam Smart website. Trustees should also remain vigilant and follow best practice in this area.
Communicate with savers before and after, as well as through their annual benefit statements
Although we recommend that schemes engage as soon as possible with affected savers, for many, the first time they may fully understand the situation will be when they receive their annual benefit statement.
Trustees should consider what information and guidance goes alongside those statements to help savers, but within the format requirements for simpler annual pension benefit statements, where these apply.
This additional information may enable savers:
- to plan and save more for their retirement by illustrating how saving more into their pension plan and /or changing the age at which they plan to retire may generate an increased pension pot at retirement
- to contact the pension scheme provider to update their details, notably their retirement plans, as referred to elsewhere in this statement
- to use balanced and objective tools, such as those provided by MoneyHelper, which helps the member to consider their income and expenditure in retirement, which may prompt them to consolidate their pensions savings into one pension plan and / or to save more into their pension, or over a longer period to boost the value of their pension pot
- access sources of additional help and information, including those offered by your own scheme as well as the MoneyHelper website and Pension Wise
- to check any pensions they have with previous employers, where they may have lost contact details, through the Pension Tracing Service
You can adapt this information to suit the general circumstances being faced by affected savers. For example, telling them how taking these actions might help remedy the situation. As well as providing a range of illustrations showing different outcomes and options that could be taken to protect and boost retirement funds at different points in the journey to retirement.
While the focus of saver communication might be centred around the annual benefit statement, consideration should be given to continuous communications. You should certainly begin communicating with affected savers before statements are issued if that is due to take place some way in the distant future. Consideration should also be given to follow up the statements with targeted communications.
Monitor the impact of your communications and engagement and adjust your plans accordingly.
Next steps
The current economic environment introduces new challenges for trustees of DC schemes. There is no one right answer and scheme specific circumstances are important. We expect trustees to consider the issues raised in this statement and take appropriate action as part of their ongoing governance responsibilities.
We continue to monitor the situation in financial markets closely to assess the impact on pension schemes, in both defined benefit and defined contribution schemes. We are speaking to trustees and their advisers about how schemes are responding to current market volatility, as well as industry representative bodies, including how they can support savers through this period.
Use the checklist below to develop your own action plan
Review your governance and investment arrangements:
- Ensure your scheme has sufficient scale to support savers.
- Dedicate enough time to govern the DC arrangements effectively.
- Review investment advisers against agreed objectives and consider the proactivity of their advice.
- Use member data and trends in behaviour to inform decisions and input into investment strategy.
- Ensure investment options remain suitable and consider how market conditions might present new risks and opportunities.
- Monitor performance against objectives and industry benchmarks and consider how different groups of members have been impacted.
- Assess how investments protect against high inflation and review the use of cash funds.
Supporting your savers:
- Strengthen your member support capability and target your efforts towards those most affected and in need of help.
- Use insights to inform your guidance and saver engagement plans.
- Review communications to ensure savers can make informed decisions about their investments.
- Review and inform savers about the support, guidance and modelling tools which may help them navigate current market conditions.
- Help savers understand what recent performance means for their individual circumstances.
- Encourage savers to inform the scheme if their retirement plans change.
- Highlight the importance of seeking advice and taking a long-term perspective on pension saving.
- Highlight the risk of potential scams.
- Consider your savers’ communication journey, including additional information to supplement annual benefit statements.
- Be specific in your guidance, to the circumstances faced by savers at different points in their retirement plans.
- Tell them how certain actions can protect or boost their savings.
- Guide them through the trade-offs that they will need to make and the risks involved.
- Monitor member action / inaction and adjust and evolve your engagements plans accordingly.