02 Mar 2023 4 min read

2022: A surprisingly good year for DC investors?

By John Southall , Detian Chen

Last year was a rocky ride for most asset classes, but our research indicates there could be light on the horizon for defined contribution (DC) pension scheme members.


With the challenging backdrop of higher interest rates, spikes in commodity prices and the resulting cost-of living crisis, investors saw significant falls in both bond and equity values in 2022. Overall, we believe a typical DC member’s holdings may have suffered losses of around 15% for the year. To add insult to injury, the cost of goods shot up by 13%, eroding the inflation-adjusted value of DC pots.

However, we don’t believe that it was all bad news for long-term investors. Our optimism is grounded in the fact that our strategic expected returns in excess of inflation have risen notably, thanks to a rise in long-term real interest rates of around 3%.

Yields that heal

To provide a little more background to our research, a common model for expected returns is based on a ‘gilts-plus’ philosophy.

The idea assumes that investors demand a risk premium above what they could secure from government bond markets. If real yields on gilts go up or down then we expect (all else equal) the inflation-adjusted returns on other assets, such as equities, to change by the same amount.

So although DC investors are currently likely to have less money in their pension pot following the market falls, the rise in real yields has boosted how fast we expect the pot to grow relative to inflation over the period until retirement.

Multiple matters

To find out the overall impact for different cohorts of DC investors, we set up a simple projection model and compared how some representative individuals’ projected pensions (in inflation-adjusted terms) fared over 2022. Our results are summarised in the table below and are based on a number of key assumptions.*

The values represent what you need to multiply the member’s projected retirement outcome at the end of 2021 by to get what the projected outcomes were at the end of 2022.

Anything above 1 is ‘good news’. For example, a member on track for a real (i.e. inflation-adjusted) income of £10,000 a year in retirement that has an ‘uplift multiple’ of two could now expect twice as much i.e. £20,000 a year.

The impact of 2022 on projected outcomes



Uplift multiple for projected tax-free cash @ retirement

Uplift multiple for projected real income in retirement
















One of the nice things about these ratios is that broadly they do not depend on the choice of investment strategy, so long as the strategy isn’t changed. For example, if you expect more annuity income because yields have risen, you also expect to receive more income ‘sustainably’ out of income drawdown in decumulation under the ‘gilts-plus’ assumption.

As you can see, in terms of projected outcomes, the overall picture for DC investors has improved markedly over 2022. Younger members could benefit the most as, given their longer time horizons, their projections are more sensitive to the level of future returns.

Members close to retirement are likely to have seen their pot shrink, resulting in lower tax-free cash amounts should they access it soon, but our calculations show that even they could now receive a higher income in retirement.

Grounds for optimism

2022 was a challenging year for many, particularly given the painful squeeze on living standards. There is a risk, not captured in the above table, of individuals reducing their pension contributions, which would worsen retirement outcomes.

Assuming individuals can find a way to leave their contributions unchanged, however, it is nice to see that there is a silver lining of sorts to 2022’s tough market environment.  

Indeed, based on reasonable projections of future pension scheme values, we believe many DC investors now have reason to be optimistic, with the potential for a substantial increase in the income they receive when they retire.


*Key assumptions

A 5% salary increase in 2022

Realised nominal return of -15% on assets in 2022

Realised annual inflation of 13% in 2022

From 2023 onwards, salaries increase in line with inflation

Contributions are assumed to be fixed proportion of salary, independent of age

Retirement age of 67

Interest rates and inflation based on Bank of England yield curves

Risk premia did not change over 2022

Starting pots are based on the above assumptions as at 31/12/2021, with contributions beginning aged 23

John Southall

Head of Solutions Research

John works on financial modelling, investment strategy development and thought leadership. He also gets involved in bespoke strategy work. John used to work as a pensions consultant before joining LGIM in 2011. He has a PhD in dynamical systems and is a qualified actuary.

John Southall

Detian Chen

Quantitative Associate, Solutions Group

Detian currently works as a Quantitative Associate in LGIM's Solutions modelling group. Detian is involved in projects detailing the research and development of financial models on asset and liability management (ALM) and investment strategies for pension schemes.

Detian joined LGIM in October 2022 from Deutsche Bank, where he worked in the product validation group and was a lead in data infrastructure governance and the assessment of model risks in equity and commodity derivatives. He holds a master's degree in Quantitative Methods in Risk Management from the London School of Economics.

Detian Chen