Skyrocketing inflation figures pose unique challenges for defined contribution pension schemes as memberships surge to record highs, according to the Pensions Policy Institute’s DC Future Book.

Though the state pension triple lock provides “partial protection” for those in retirement against inflation, the PPI warned that the cost of living crisis could be compounded if returns on investment do not match inflation, which would lead to erosion in the value of DC pots.

Active DC membership now stands at 13.8mn people, 10.7mn of whom were automatically enrolled, leading to a workplace pension participation rate of 79.4 per cent.

DC scheme investments tend to lack inflation protection
Overall, 90 per cent of scheme members are now in DC schemes, compared with just 3.1 per cent of members belonging to defined benefit schemes.

But the PPI warned that this poses unique challenges, especially in the current economic environment, given the tendency of DC schemes to invest in assets that are not properly protected against high inflation.

At present, there is around £545bn in aggregate assets invested in DC schemes, which is expected to grow to around £1.03tn by 2042.

Master trusts account for 9mn active members, 96 per cent of whom are invested in default strategies holding the highest value of aggregate assets at an average of £3.1bn.

While the average pot size continues to grow, now standing at £11,800, the Future Book, which was published in association with Columbia Threadneedle, showed that average contribution rates have stagnated and 10.5mn people are still ineligible.

When it comes to accessing pensions, it found that fewer people access their DC pots for annuitisation and drawdown compared with pre-pandemic levels — annuity sales are up 10 per cent since 2020, but this has not made up the difference — while full and partial withdrawals have increased above pre-pandemic levels.

Pragmatism on investment strategies required
The book also suggested a trend towards members taking less advice when accessing their pensions at the point of retirement. Forty per cent of people pursue income drawdown without taking advice, and 84 per cent purchase annuities without seeking advice.

Lauren Wilkinson, senior policy researcher at the PPI, said: “As the transition from DB to DC continues and we start to see more people reaching retirement with greater dependence on DC savings, it is increasingly important that we have a detailed source of longitudinal analysis by which we can monitor the implications of existing policy and provide a solid evidence base for future policy innovation in order to support better retirement outcomes.

“Aggregate DC assets are projected to increase to around £1.03tn over the next 20 years, and alongside this rapidly expanding market share comes a responsibility for DC investment decision-makers to focus on protecting their members’ savings.”

Andrew Brown, client relationship director at Columbia Threadneedle Investments, added: “The past 12 months have seen extraordinary challenges — between the ongoing effects of the Covid-19 pandemic, the war in Ukraine and additional supply chain constraints, inflation in the UK has reached its highest level in 40 years.

“As the PPI notes, unexpected and significant increases in inflation are likely to have far-reaching effects for people and present a considerable risk to their retirement outcomes.”

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