UK: Defined Contribution Schemes - Watching Out For The Workers

Last Updated: 3 October 2007

A ‘lifestyle’ facility in a defined contribution pension scheme can be helpful to many people – but it doesn’t suit everyone, warns Chris Murray. He looks at ways in which members can lower their investment risk and safeguard returns.

"The value of your investments may go down as well as up." This sombre warning is particularly apt given the recent rollercoaster performance of world stock markets. The final salary pension schemes of FTSE 100 companies can be bounced into deficit or surplus as a result of these changes, making headline news. But what about the workers and their pensions?

Various strategies already exist which help to manage the deficits faced by final salary pension schemes. But these are of little help to the increasing number of people in the UK who are members of defined contribution (DC) pension schemes, which include both occupational money purchase schemes and personal pension arrangements.

It is generally believed that equities (shares bought on the UK or overseas stock exchanges) are likely to produce better returns than other classes of asset over the longer term. Within DC schemes, most ‘default’ funds, which tend to be one kind of managed fund or another, incorporate a significant equity component. Balanced managed funds typically hold about 75% of their assets in equities and cautious managed funds tend to hold around 50%.

Market volatility (investment risk) is not necessarily an issue for people until five to ten years before they retire, as there should be sufficient time for markets to recover before the funds are needed to buy a pension (annuity). But how can people protect themselves against a sudden fall in the value of their investments when they are approaching retirement?

Protecting your investment

Many DC schemes have a ‘lifestyle’ facility that helps to reduce the investment risk for individuals by gradually moving funds out of equities into asset classes that are usually considered less volatile. This typically means moving 75% of the funds into fixedinterest investments, made up of loans to the Government (Government bonds – ‘gilts’) or to companies (corporate bonds). The remaining 25% is usually directed into cash.

Although fixed-interest investments tend to be less exciting in terms of potential return, they have a real benefit as they are closely linked to the cost of annuities. This means that if gilt prices fall when an individual is close to retirement, then the cost of buying an annuity is very likely to fall as well, offsetting a major part of the reduction in fund value. However, if equity prices fall just before retirement, annuity prices are unlikely to reduce. In fact, they could even increase, creating a gulf between expectation and reality.

Given the seriousness of this issue and the inherent volatility of stock markets, it is surprising that there are still many schemes where such a facility does not exist. This can leave members of such schemes financially exposed at retirement.

Addressing individual needs

The introduction of a lifestyle facility, whether as a default investment strategy or by personal choice, may not suit everyone. It would mean that people who wish to, for example, retire five years early, would not have even started to move into the lowerrisk environment. Instead, they may still be wholly invested in a managed fund, holding perhaps 75% of assets in equities, which is potentially very risky.

There are other people for whom a lifestyle facility may also be inappropriate. For instance, if you have a large retirement fund, there may be a case for moving into an ‘income drawdown’ arrangement (more recently termed ‘unsecured income’) on retirement. Arguably, there is little point having 75% of the available fund in bonds of one kind or another (although the 25% cash might be appropriate) if you want to carry on investing the residual fund for another five to ten years, having taken the allowable tax-free cash.

If your DC scheme does nothing to lower investment risk as members approach retirement, then employers (and employees) could be in for a nasty shock if equity markets display excessive volatility during the critical five to ten-year period before retirement.

So how can the interests of the workers be protected? The introduction of an investment strategy that incorporates a lifestyle facility may well alleviate the problem for the great majority of workers, but care needs to be taken to recognise the few for whom this might be unsuitable. An even more effective solution is to arrange for individual investment advice to be given to those who are within five years of their intended retirement, to allow an individual investment strategy to be designed.

So while a lifestyle option can be useful as a default choice for corporate pension schemes, it is not an appropriate route for all individuals. People have different investment needs and attitudes to risk. It’s important that these are considered at the appropriate time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.