Pensions schemes are responsible for delivering good long-term outcomes for pension savers. To do so, we expect all schemes to have high standards of investment governance so that they can make good decisions on behalf of savers in all economic conditions.
Recent trade and geopolitical tensions brought about by US trade tariffs continue to drive market volatility. In particular, concerns around inflation, interest rate movements and global growth are contributing to a dynamic and unpredictable investment environment. We expect elevated volatility to persist for some time as the impacts of the trade tensions and central government policy responses feed through.
As we recently shared with industry, we have been stepping up our focus on investments including doubling our number of investment consultants and changing our structure to be more outcome and market focused. This is in line with our shift in approach to a more prudential style regulator where we monitor risks at an individual scheme level and those that come from the market and wider financial system.
Through our market oversight, we are in regular contact with trustees of defined benefit (DB) and defined contribution (DC) schemes and mindful that schemes have different circumstances and different investment strategies, we have been checking how they are responding to the current market environment. This report reflects our insight and observations and highlights risks trustees will need to watch for and respond to.
Published: 1 May 2025
How pensions schemes are being affected
While market events will have affected all pension schemes, our engagement with schemes indicates the impact so far on both DB and DC pension schemes appears to have been modest.
As expected, trustees of DB and DC schemes will be responding to market developments in different ways to reflect their different objectives and risk exposures.
Across DB schemes we can see the following.
- Many will have experienced volatility affecting both return-seeking assets and liability matching assets.
- The impact on DB funding levels will vary depending on a scheme’s asset allocation and hedging arrangements. Schemes with higher exposure to return-seeking assets will be more significantly affected by volatility.
- Our latest analysis shows that many DB schemes are better funded than ever with 82% fully funded on a technical provision basis. This means that most DB pension schemes can absorb short-term shocks due to their funding level and long-term investment horizon. However, trustees will need to remain alert to immediate and emerging risks. This is particularly the case where employer strength is uncertain, including where the employer is particularly vulnerable to changes in global trading patterns.
Across DC schemes we can see the following.
- Some media headlines may have caused concern to individual DC members who may have seen the value of their pots fluctuate. Trustees will need to consider this when they communicate with savers.
- Some DC schemes planning transition activity in the coming months are reviewing their position, considering additional communications around this, and introducing additional monitoring to ensure transacting remains appropriate for market conditions. This does not mean pausing all transitions but keeping a watching brief and having processes in place to monitor trade activity.
Both DB and DC schemes that have new portfolios and/or strategies soon to be implemented are monitoring market movements and forming contingency plans to delay implementation if needed.
Our expectations of trustees
Market volatility has been a reality and will continue to be a reality for pension schemes in the future. These episodes offer an opportunity for trustees to consider and review their arrangements and ensure they are fit for purpose.
As a trustee of a DB or DC scheme, you should have robust governance and operational resilience to adapt to changing market conditions. You should have clear communication lines with employers, advisers and other delegated authorities so that you are ready to take action when you need to.
You should also remain alert to scams. Scammers target savers posing as advisers during times of economic uncertainty and as a trustee you are the first line of defence.
Best practice for DB schemes
We have identified five key areas where DB trustees should focus.
Scheme liquidity and cashflow management
Trustees will need to ensure short-term liquidity and cashflow requirements continue to be met so that they can focus on their longer-term investment strategy.
They should question whether they need to:
- assess expected short to medium term cash outflows and how these will be met
- monitor liquidity buffers under liability-driven investment mandates and be ready to provide additional liquidity should the buffer fall below the minimum requirement
- look at cashflow needs arising from currency hedging and how any associated losses should be funded
Trustees should also:
- monitor changes in member behaviour, for example retirements, early retirements and transfers that could increase cash demands
- be alert to any delays to expected deficit-repair contributions (DRCs) that may affect available cash and understand and react appropriately to the cause of any such delay
We published guidance on using leveraged liability-driven investment and we encourage you to remind yourself of this as we continue to see the potential for volatility in the bond market.
Investment strategy and risk management
Trustees should ensure their investment strategy continues to meet the changing economic landscape. Trustees should engage with their investment advisers and investment management service providers and question if they need to review:
- current rebalancing arrangements to limit the risk and cost of excessive trading. In some instances, trustees may feel it is appropriate to suspend or refine these requirements
- diversification levels and any concentrations of risk by asset class, sector or counterparty to limit the impact of any adverse market movements
- the timing of any pre-agreed asset transitions, strategy changes or de-risking triggers
- the resilience of their investment arrangements to tail risks
- the need to consider changes in investment strategy and market weightings given structural shifts in longer-term tariff policies
Governance and operational resilience
As markets are likely to continue with elevated volatility for some time, trustees should ensure their scheme investment and risk governance is sufficiently flexible so that they can respond to short-term market developments. Trustees should check:
- the terms of reference for any subcommittees to ensure sufficient operational flexibility and delegated authorities are embedded
- all authorised signatory lists are up-to-date and have been executed correctly
- current investment and risk governance arrangements: in light of elevated market volatility and geopolitical risk, trustees should ask themselves if they need to consider an alternative investment governance structure which can respond more quickly to market developments and changes in the market environment
Covenant and employer considerations
Trustees of those schemes which are relying on their employer should proportionately seek to understand how a changing economic landscape may impact their employer’s ability to support their scheme. Trustees will need to do the following.
- Consider to what extent the employer’s business may be affected in the short and long term by recent volatility in the global trading environment. This should include a consideration of the impact on the employer’s key customers and suppliers. This may require continuing assessment as the direct and indirect impact may currently be unclear. Where such an assessment is complex, for example due to a dependence on an international supply chain, trustees should consider whether professional external covenant advice may be required, if an adviser is not already engaged.
- Try to form a view of the impact the recent volatility may have on an employer’s financial headroom and its ability to continue to provide support to a scheme, particularly where DRCs are material to a scheme’s long-term funding target. Trustees may also consider the potential impact of the volatility on known future events such as a debt refinancing deadline.
- Where trustees consider that an employer’s business is materially exposed to global trading volatility, they should ensure that a robust information-sharing protocol is in place and that they have adequate access to senior company personnel. This will enable them to monitor any likely detriment to the strength of the employer covenant. Consideration should also be given to whether any contingent asset could be available to mitigate a weakening of the covenant.
- Where concerns are material, trustees should review with their advisers and consider whether investment and risk management actions are needed to protect saver outcomes.
Opportunities and funding level changes
So that schemes can navigate a changing investment landscape in a timely manner, trustees of schemes that are on a de-risking journey should be ready to:
- take advantage of improved funding levels by reappraising their policies on de-risking or risk transfer
- consider how future easements on surplus release might influence these policies
- consider how best to invest and potential sources of funding for that investment if market dislocations present investment opportunities
Best practice for DC schemes
We have identified three key areas where DC trustees and their advisers may wish to focus.
Member communications to help members make informed decisions
While most DC members have long-term investment horizons, short-term losses in fund values can cause members to switch their investments and lock-in current market losses. These short-term losses can discourage them from saving or lead to opt-outs, particularly in financially challenged households. Trustees will need to understand their membership and how different cohorts are affected by market movements and may seek to:
- monitor changes in member activity, for example additional queries, withdrawal requests and fund switches to cash
- provide guidance and clear information about the implications of current market conditions across different retirement timelines
- encourage members to seek advice and guidance before switching funds to avoid crystallising losses
- remind members to be aware of scams, which become more prevalent during periods of stress: our communication tools and guidance will help trustees raise awareness about the risk of scams
Investment and risk management
Trustees will need to monitor risks and may wish to consider with their advisers if their investment strategy should be reviewed to ensure it meets the changing economic landscape. Trustees and their investment advisers may wish to review:
- rebalancing arrangements currently in place to limit the risk and cost of excessive trading; trustees may feel it is appropriate to suspend or refine them
- diversification levels and any concentrations of risk in funds, for example in passive equity mandates or in self-select options
- whether any planned transition activity like bulk transfers, fund switches or rebalancing remain appropriate, and have contingency plans for transition activity if market volatility continues
Strategic oversight
Trustees may seek to identify potential opportunities and consider evolving the investment strategy. Trustees should be mindful that investment markets are always evolving especially after market turbulence. Trustees may wish to work with their advisers to consider how they might evolve their investment strategies or investment and governance arrangements at an appropriate time. Some of these opportunities may involve identifying and assessing value-enhancing investment opportunities or value preservation strategies.
Next steps
Through our market oversight, we will continue to monitor how the current market environment is impacting pension schemes.
We will update our engagement and guidance where appropriate and continue to regularly engage with schemes.