Your pension could fall by a third as market goes into meltdown – see if you are affected


Reports that £1.5 trillion worth of workplace pensions have been swept up in the current economic turmoil will have terrified millions of Britons who rely on them to fund their retirement income. Most will be safe but some may suffer.

The last thing anyone needs in the middle of today’s cost of living crisis is to see their pension plunge.

The nation faces an anxious wait to see whether Chancellor Kwasi Kwarteng can pull the UK out of economic turmoil by making yet another u-turn on his controversial mini-Budget.

Pensioners will be the most anxious, as the subsequent sell off in UK government bonds, known as gilts, triggered a pensions meltdown.

It was only halted by Bank of England Governor Andrew Bailey, who pledged to buy £65 billion worth of gilts to prop up prices and stop yields rocketing beyond five percent.

The BoE’s emergency bond market intervention only lasted 14 days and ends at close of trading today, when all hell will break loose unless Kwarteng takes decisive action.

The impact will depend on what type of pension you have – whether defined benefit or defined contribution. In many cases, people have a combination of the two.

Defined benefit workplace pensions, also known as final salary schemes, are on the front line of the crisis.

They are obliged to hold enough assets to fund a steady, reliable retirement income to members.

Nothing is more steady and reliable than gilts, or so scheme trustees thought. So they loaded up on those.

When gilt prices plummeted they had to raise cash by selling gilts. This caused a “doom loop” as the subsequent drop in prices forced them to sell more and more gilts, until the BoE stepped in to preserve financial stability.

Up to 3,000 schemes held gilts in so-called liability-driven investment funds, or LDIs, which are so complex even the Bank of England didn’t appreciate how risky they were, despite warnings.

The BoE saved the day but now Bailey is refusing to extend his emergency bond-buying programme. The nation is on tenterhooks to see what will happen next.

READ MORE: House price crash warning – our finances turned upside down

The general message for defined benefit scheme members is do not panic, said Tom Selby, head of retirement policy at AJ Bell. “There is very little chance anyone’s retirement pot will be fatally damaged by the current crisis.”

Investment risk sits with the employer, not the individual, Selby said.

They are ultimately responsible to make up any funding shortfall, not you.

So as long as the sponsoring employ remains solvent, you should be safe, Selby added. “Even if the employer does go bust, which is extremely unlikely, the Pension Protection Fund provides a valuable safety net.”

Today most workers pay into defined contribution schemes. In this case, their pot is invested in shares and other assets, and how much they get at retirement depends on performance.

These schemes do no use LDIs, but members still face two dangers. The first is that pension sizes will have been reduced by this year’s market meltdown.

This is less of a problem for those who are still working. They can simply leave the money invested and wait for the stock market to recover, as history shows it always does in the end.

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However, pensioners who have started drawing retirement income via drawdown will see their pots shrink, at the same time as living costs rocket. They will need to manage withdrawals carefully until the recovery comes.

The biggest risk of all has been largely overlooked, said Kevin Hollister, pensions actuary at Guiide. It affects defined contribution members who plan to retire in the near future.

Most schemes automatically shift pension pots from shares to gilts as they near retirement, a process known as “lifestyling”.

This is the default option on 90% of pension schemes, so a large number could be affected.

The aim is to shelter scheme members from a last-minute stock market crash, but the problem is that now bond prices have crashed, too.

“Some will have seen a large reduction in their pots, 30 per cent or so, just before they plan to take them,” Hollister said.

If worried, contact your pension provider and check whether your pot has been moved into gilts, and how much its value has fallen as a result.

If you are lucky, your pension will have been moved into cash. If it has been moved into bonds, one option is to leave your money invested for a while longer, and wait for the gilt market to stabilise and bond prices to rise again once the current panic ebbs.

If you still plan to take the money and buy an annuity, there is a silver lining, Hollister added. “Annuity prices have risen by around 30 per cent in response to rising interest rates, which may offset any losses.”

Most savers will be unaffected by the pensions crisis but the few who find themselves in the firing line need to tread carefully and should consider taking independent financial advice.


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