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UK DC plan assets hit by falling markets

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  • UK DC plan assets hit by falling markets

UK - Falling global equity markets have caused the total assets in UK defined contribution (DC) plans to drop 2.3% to £420bn (€488bn), Aon Consulting has revealed.

Figures from the firm's DC Pension Tracker showed the first drop in asset values for four months, highlighting the need for employers to review default investment options and the exposure to underperforming assets.

Aon claimed the fall in asset values in June is a reminder that neither employers or scheme members can rely on market rallies to recoup recent losses, because even at the end of May - when assets reached £430bn - DC schemes still needed to earn another 28% to recover to the peak of £550bn in September 2007. (See earlier IPE article: DC recovery needs another nine months - Aon)

Therefore the consultancy suggested employees need to ensure they make adequate contributions to DC schemes to try and offset the market volatility as employers are unlikely to be able to increase contributions in the current economic climate.

Richard Strachan, senior consultant at Aon Consulting, said: "An expectation that the employer alone will provide for a cosy retirement is unfortunately founded on misplaced optimism rather than realism."

He pointed out employers are under severe budget pressures and "in the present climate businesses are unable to increase pension payments, so it is all the more important that individuals understand the need to contribute enough themselves every month".

Analysis from the DC pension tracker showed 60-year old workers contributing 10% of a £25,000 salary into a pension fully invested in equities had been significantly impacted by the deterioration in June as their potential retirement income dropped 3.8% to £10,373 a year - approximately 31% less than the high of £15,088 in September 2007.
 
Meanwhile a 30-year old contributing the same level into a DC scheme would also have seen the potential retirement income drop by around £350 to £20,659 a year, although this age group would have time to recoup recent losses.

That said, Strachan warned both employers and members need to keep on top of investment choices, as the Pensions Regulator (TPR) had previously identified the lack of due attention to default investment options as one of five key risks for DC schemes.

"Historically, much attention has been paid to the establishment of a plan's default investment option, but many employers do not monitor the ongoing suitability of these choices and as a consequence their employees are exposed to the risk of an underperforming investment," he added.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com
 

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