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The first quarter of 2026 opened with a sharp escalation in the ongoing conflict in the Middle East, culminating in the outbreak of open war. In late February, Israel and the US launched a coordinated series of nearly 900 airstrikes on Iran, targeting nuclear and military infrastructure, as well as senior leadership, which resulted in the death of Supreme Leader Ali Khamenei.  

The war has since skyrocketed, with Iran retaliating through extensive missile and drone strikes against Israel and US military bases across the Gulf Cooperation Council region. Iran has also closed the Strait of Hormuz, driving spikes in global oil prices and causing energy market volatility. The ultimate macroeconomic impact of the war remains to be seen, with future conditions depending heavily on the outcome of the ongoing ceasefire negotiations. 

In the US, the Supreme Court reached a landmark decision to strike down the sweeping tariffs previously implemented by the Trump administration, ruling that the President had exceeded his statutory authority, which has now raised questions of potential refunds to corporations in collected revenues. In response to the setback, the President announced an alternative trade strategy, with new tariffs of 15% across the board.

In this latest update, we consider the events that shaped the first quarter of 2026 and share our thoughts on what we believe this means for UK DC Schemes. We also share some research articles at the end that we hope will be of interest to you.

Economic Summary – Q1 2026

US real GDP rose 0.5% (q/q saar) in Q4 2025, down from the Q3 estimate of 4.4%. Headline US inflation increased to 3.3% in March 2026 from 2.7% in December 2025. Core inflation was at 2.6% in March, unchanged from 2.6% at the end of December. The Fed, at its March meeting decided to keep the Federal funds rate to 3.5%-3.75%. In the Summary of Economic Projections, the median projection showed one 25bps cut each in 2026 and 2027.

The UK economy grew by 0.1% (q/q) in Q4 2025 in line with Q3 2025. Headline inflation in the UK fell to 3.0% in February from 3.4% in December. In its March meeting, the monetary Policy Committee (MPC) voted unanimously to maintain Bank Rate at 3.75%. 

China's GDP grew by 4.5% (y/y) in Q4 2025, a slowdown from 4.8% in Q3 2025. China's inflation rose to 1% in March 2026 from 0.8% in December. The People's Bank of China's 1-Year Loan Prime Rate (LPR) stands at 3.0%, unchanged since its reduction in May 2025.

Japan's economy grew at a revised annualized rate of 1.3% in Q4 2025, rebounding from a 2.6% contraction in Q3. In its March meeting, the BoJ left its key short-term rate unchanged at 0.75% at its March 2026 meeting, keeping borrowing costs at their highest since September 1995. 

In Q4 2025, seasonally adjusted GDP increased by 0.3% (q/q) in the euro area. The ECB kept interest rates unchanged in its March meeting, maintaining the deposit rate at 2.0%. Headline inflation in the eurozone rose to 2.5% in March, from 2% in December.

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Investment Performance Q1 2026

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Local Currency Return can be considered as the approximate return of a hedged index in the respective markets, excluding hedging costs.

*Property returns are to 28 February 2026 due to unavailability of December data at the time of writing.

  • Global equities fell 1.2% in unhedged sterling terms and -2.4% in local currency terms. Sterling depreciated against the US dollar. Global equities finished Q1 2026 lower due to the geopolitical uncertainty regarding the Middle East conflict, soaring oil prices, rising interest rate expectations, and a heavy rotation out of Artificial Intelligence (AI) exposed tech stocks.
  • Global government bond yields moved higher across the curve in Q1, with most economies witnessing a flattening bias, as short-term yields spiked more than the longer end of the curve. In the US, the yield curve flattened, with the 2-year yield rising 32bps, while the 10y and 30y moved modestly higher in comparison by 15bps and 7bps, respectively.
  • In Q1 2026, sterling weakened against the US dollar, euro, and Japanese yen from a quarter ago. Meanwhile, the dollar index gained ~2% over the quarter as markets priced out rate cuts in 2026, amidst corporate fundamentals that held up well. On a 12-month basis however, sterling strengthened 8.7% against JPY and 2.2% against USD, while declining 4.2% against EUR.

What this means for DC Schemes

  • The first quarter of 2026 should result in the majority of DC default growth portfolios delivering in negative territory, in light of the current geopolitical uncertainty. We estimate that the majority of default growth portfolios will have delivered returns in the range of -5% to 0% over the period.
  • For lifestyle strategies targeting income drawdown at retirement, the lower risk multi-asset funds typically used in the de-risking phase up to retirement are expected to have negative absolute returns also. We estimate that the majority of these de-risking portfolios will have delivered returns in the range of -2% to 0% over the period.
  • Returns from Diversified Growth Funds (DGFs) varied as usual over the quarter, with core strategies mostly having returns in the range of -4% to -1% while idiosyncratic strategies (which typically have more investment levers at their disposal relative to core DGFs) delivered returns in the -1% to 3% range. Outside of DGFs, some DC schemes are turning to alternative options for diversification, such as infrastructure, protected equity, commodities, and multi-asset credit.  We do note that availability for these types of strategies can be more limited, with platform availability key to whether they may be appropriate for consideration.
  • In March, the Chancellor delivered her annual Spring Statement, although there were no significant pension-related announcements relevant to UK DC Schemes. Trustee should note that the changes announced in the 2025 Autumn Budget still apply, including the pension salary sacrifice threshold amendments. For more information on how Mercer can support with the implementation of the changes and employee communications, please reach out to your Mercer DC Consultant.
  • The UK government has described 2030 as the “watershed date” for its future vision of the DC pension market to be in place. The detail set out in the government’s Pension Schemes Bill, and it’s focus under Phase Two of the pensions review, marks an important convergence of many items that have long been bubbling away in the background. We have presented our thoughts on the four key themes that we see dominating discussions in 2026 and some actions for UK DC schemes to consider, here: https://www.mercer.com/en-gb/insights/pensions/defined-contribution-schemes/uk-dc-themes-opportunities-for-2026/

Mercer Investment Research

The following research papers are accessible via the Mercer Insight Community. If you are not currently registered, you can sign up here. This will give you access to all Mercer investment articles as well as a procured list of articles from fund managers across the industry.

Mercer, April 2026

For further information or to discuss any of the themes contained within this document, please speak to your usual Mercer DC consultant.

Important Notice

This contains confidential and proprietary information of Mercer and is intended for the exclusive use of the parties to whom it was provided by Mercer. Its content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity, without Mercer’s prior written permission.
Information contained herein has been obtained from a range of third party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential or incidental damages), for any error, omission or inaccuracy in the data supplied by any third party.


This does not constitute an offer or a solicitation of an offer to buy or sell securities, commodities and/or any other financial instruments or products or constitute a solicitation on behalf of any of the investment managers, their affiliates, products or strategies that Mercer may evaluate or recommend.
For the avoidance of doubt, this paper is not formal investment advice to allow any party to transact. Additional advice will be required in advance of entering into any contract.


The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed. Past performance does not guarantee future results. Mercer’s ratings do not constitute individualised investment advice.

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