The process of pension de-risking in the UK has raised concerns among retirees. In a defined contribution pension scheme, both employees and employers contribute to a pension fund, which grows through investments until retirement. However, as retirement approaches, the de-risking process begins. This involves shifting pension investments from higher-risk assets to government bonds (gilts) and later transferring them to insurance companies. While this may seem like a cautious strategy, it has led to significant financial drawbacks for pensioners.
How Pension De-Risking in the UK Works
At a certain point—typically 10-15 years before retirement—pension funds undergo de-risking to reduce exposure to market volatility. This involves:
- Moving investments from equities to government gilts for more “stability.”
- Using gilt-generated cash flow to make pension payments.
- Eventually transferring pension liabilities to an insurance company through a bulk purchase, referred to as the “endgame” phase.
While these steps aim to protect pension funds, the reliance on gilts as a safe investment has proved problematic.
The Problems With UK Pension De-Risking
The assumption that gilts provide stability has been debunked over the years. Long-term gilt yields in the UK turned negative more than a decade ago and have remained low ever since.
This issue stems from several factors:
- The 2007-2009 financial crisis led the Bank of England to lower interest rates to below 1% to encourage spending.
- In 2020, rates dropped to 0.1% during the pandemic, further reducing gilt returns.
- In 2021, a 10-year index-linked gilt had a -3% return, meaning pensioners effectively lost money.
Experts argue that an aging population has worsened the issue. As more people approach retirement, pension funds undergo mass de-risking at the same time, triggering unintended economic consequences.
How De-Risking Has Hurt the UK Economy
Large-scale de-risking has:
- Pulled billions from UK equities into government bonds, reducing capital in the stock market.
- Lowered the UK’s risk appetite, making it less competitive than other global markets.
- Trapped pensioners in overvalued bond markets, leading to huge losses when interest rates normalized.
Every pension fund that underwent de-risking between 2008-2021 bought into overpriced gilts. As interest rates returned to normal levels, these bonds lost significant value, negatively impacting retirees.
Why You Should Transfer Your UK Pension to India Through QROPS
If you have worked in the UK but plan to retire in India, you can avoid pension de-risking in the UK by transferring your fund through QROPS (Qualifying Recognised Overseas Pension Scheme).
Here’s why a QROPS transfer is a better choice:
- Escape negative gilt returns that shrink pension value.
- Invest in one of the world’s fastest-growing economies, with higher interest rates and better returns.
- Avoid forced de-risking and maintain full control over your retirement savings.
- Reduce tax liabilities and protect your pension from inheritance tax.
With India’s economy expanding rapidly, transferring your pension through QROPS ensures financial security, higher returns, and long-term stability.