Aon warns DC scheme members are facing ‘severe’ inflation threat

Benefit solutions division principal Helen Dowsey said present individuals faced losing around one fifth of the purchasing power of their pension over the next five years – and potentially more if inflation rates continued to rise.

She said: "Some 60pc of people who retire from DC schemes elect to receive a level pension – fixed rate annuity – that doesn’t increase each year. During recent periods of low inflation and with the prospect of high inflation seemingly remote, this option has appeared most attractive to retirees.

"The alternative option of choosing a pension that increases has historically been more expensive and thus less appealing. However, the majority of individuals who have bought into fixed rate annuities are likely to now experience a severe erosion of the purchasing power of their pension because of the rising rate of inflation.

"While there is little protection for retired pension scheme members, existing members need to take measures to defend against such negative implications."

She said individuals should consider investing in asset classes that offer inflation protection to safeguard their pension pot.

"Over long periods of time equities have tended to provide an element of inflation protection and therefore investing in equities, particularly for younger workers, should help. For those approaching retirement, the most appropriate asset class may be index-linked gilts. Interestingly, this asset class has been rather un-fashionable in the last few years in times of low inflation," she said.