Concerned about how secure your pension pot is?

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If you’ve seen news headlines about the financial stability of pension funds, you may be worried about the impact on your own plan. Here we summarise the facts and explain how your own pension is managed. 

A lot happened in financial markets following the UK’s mini-budget. During all the ups and downs, you may have seen news stories about the situation affecting pensions. 

We simplify the key points for different types of pension schemes. 

Why did the UK mini-budget affect pensions?

First, you need to understand what a government bond is – known as a gilt. In essence, these are the ‘IOUs’ the government sells to investors to raise money to fund their plans.

Many investors sold their gilts following the mini-budget, as there was a lack of clarity about how the government would pay for the tax cuts and spending it was proposing (before it later reversed its plans). This mass selling sent the price of gilts plummeting.  

Why does that matter to different types of pensions? Well some typically hold large amounts of bonds and gilts. However, different types of pension solutions were affected in different ways. Here’s what you need to know.

What’s been the impact on defined benefit (DB) pension schemes?

DB schemes – also known as final salary schemes – were most affected by the falling bond markets. They’re among the largest buyers of gilts, so also some of the largest lenders to the UK government. 

DB schemes promise to pay a set amount of income to a retiree. This is based on the person’s final salary and how long they worked for. Decisions about where the pension scheme is invested lie with its trustees. It’s also the trustees’ responsibility to make sure there's enough money in the scheme to pay to employees or former employees when they're taking their retirement savings.

When bond markets began falling following the mini-budget, some DB pension schemes rushed to sell their gilt holdings and other assets. This was so they could free up cash to meet certain criteria related to how they invest. However, the extra supply of gilts was not matched by demand from investors willing to buy them. 

This prompted the Bank of England into making a historic move – stepping in and buying £65 billion in bonds. The intervention was intended to stop gilt prices falling further, stabilise markets and thus stop the vicious circle that was emerging of DB schemes selling gilts into a market of falling prices, reinforcing the fall in gilt prices which in turn was forcing them to sell more gilts. 

There were further falls after the Bank of England Governor announced a three-day timescale for pension funds to resolve their issues. However, gilt markets then recovered on the announcement of a new Chancellor and then the reversal of the previously announced tax changes. 

What’s been the impact on defined contribution (DC) pension plans?

Nowadays, most people are in DC pension plans, where we contribute over the course of our working lives into a pension scheme.  The value of a DC pension pot depends on how much you and your employer pay into it (contributions) and how the underlying investments perform over the long term. These are typically a mix of different asset types including stocks (company shares) and bonds. Its value can go down as well as up and could be worth less than what was paid in.

With a DC pension plan, you have the option to choose your own funds if you feel like you have the time, knowledge and confidence to do so, or your employer or adviser may have done this for you. And you can decide how you want to take your money in retirement. 

The performance of DC investments may have been affected by all the market fluctuations. So you may have seen the value of your DC pot falling in the short term. Remember though, that these type of pension products are designed with the long term in mind. You can find out more about this here: Uncertain times and market fluctuations – what does it mean for my pension investments?

There’s extra help in place, if the worst happens

Let’s look at DB schemes first. If the employer becomes insolvent and its DB scheme is unable to pay members their pension, a statutory public corporation, known as the Pension Protection Fund steps in. Its duty is to protect people with DB schemes if this happens.

For some DC pension plans, you may be eligible to claim compensation as a last resort from an independent service called the Financial Services Compensation Scheme (FSCS). This would be in the event that an authorised financial firm fails and ceases trading. It does not provide protection against investment performance.

How we manage your Standard Life DC pension plan

We design our pension solutions with a genuinely long-term mind-set and continuously monitor them. Financial managers are considering all the risks and opportunities, now and way in the future, aiming to grow your pension pot for when you need it.

If you’ve decided to choose your own funds, it’s important to check that these remain appropriate to meet your long-term goals.

If you have a Standard Life pension plan, you can easily check where you’re invested by logging in or registering for online services.

Consider your circumstances and get advice if you need to

It’s important to consider your own circumstances. For instance, you may have a mix of a DB scheme from a previous employer, plus a DC plan you’re currently paying into. You might be some way from retirement, about to access your pension money for the first time, or already taking money from your pension plan. 

It’s a big decision to make changes to your pension plan and it could impact how much you’ll have in the future. So you may want to take professional advice before making any decisions. If you don’t have a financial adviser, you can find a list of advisers on the FCA website. Unbiased is an independent site that can help you find the right adviser for you. 

The information in this article should not be regarded as financial advice and is based on our understanding in November 2022.