One million older workers face new pensions misery

The retirement plans of up to a million workers are in tatters as the recent collapse of supposedly safe government bonds eroded the value of their retirement pots.

Most affected are those who took out company pensions in the 1990s and 2000s, or who paid into individual stakeholder plans over the past two decades with well-known names such as Legal & General, Fidelity Aegon, Aon and Scottish Widows.

Their pension pots are automatically moved to so-called ‘lifestyle’ funds, usually five years before retirement age.

These funds invest in fixed income investments – including bonds – and are designed to be less risky than other more volatile asset classes such as equities.

But the sharp rise in interest rates has increased yields on government bonds, known as gilts, driving bond prices down sharply.

The sell-off accelerated after ex-Chancellor Kwasi Kwarteng’s disastrous mini-budget in September, until the Bank of England stepped in with a £19bn bailout.

But Gilts were still one of the worst performing major asset classes of 2022.

It means more than £4.5bn has been wiped out of the value of older workers’ pensions, with an estimated £15bn invested in these lifestyle bond funds, according to investment platform AJ Bell. As a result, about 850,000 workers have lost an average of 32 percent this year.

“The past year has been a bit of a mess in the markets, and a big sell-off in bonds has led to some pretty poor performance numbers for pension funds,” said Laith Khalaf, chief investment analyst at AJ Bell.

“The irony is that these funds also include bonds because they are traditionally seen as safe assets, but this idea has been muddled for the past 12 months.”

This has led to renewed criticism of lifestyle funds and their default, one-size-fits-all investment approach, which shifts retirement savers from stocks to bonds as retirement approaches, regardless of individual circumstances.

“Older workers have been let down by the Bank of England and their pension provider,” said former Pensions Minister Ros Altmann.

‘Lifestyle funds are completely unsuitable for many people. They no longer fit their lifestyle, but no one asks the customer. Chickens come home on a roost.’

The latest retirement shock follows the one that engulfed final salary plans during the recent Gilts crisis, when the use of liability-based investment (LDI) strategies revealed dangerous levels of hidden leverage in the financial system.

Unlike final salary plans—which pay an employer-guaranteed income in retirement—lifestyle funds are an essential part of defined contribution (DC) plans, where the individual assumes all investment risk.

Charles Counsell, CEO of Pensions Regulator, told MPs investigating the LDI debacle last month that there was “an impact on DC schemes as well.”

“If you are an investor nearing retirement and participating in a lifestyle plan that has largely been converted into bonds, the value of their plan will have fallen,” he said.

“People will start to see this in their financial statements, if they haven’t already,” Counsell added.

He urged participants in defined contribution plans to ‘think carefully’ about their retirement planning.

AJ Bell’s Khalaf said designing a default fund was “a thankless and difficult task.”

He added: “You choose just one fund for hundreds or possibly thousands of people in the workplace, all with different attitudes to risk and different financial circumstances. This invariably leads to standard funds being simply the least bad option.

‘Pension savers should bear in mind that they can invest in almost all pension schemes outside the standard fund, in a fund that suits them better.

‘Of course you have to roll up your sleeves and do some homework, but the reward is a richer pension.’