The report, comparing the investment performance of the biggest Master Trust providers’ default funds (accounting for 94% of the market), examines each of the three main phases of DC investment. These are:
• Growth phase (30 years to retirement): At this stage investment risk (and the prospect of higher returns) should take priority over short term risk mitigation, which is of questionable value this far out from retirement.
• Consolidation phase (5 years to retirement): Here the focus should shift to capital preservation, solid returns and risk reduction.
• Pre-retirement phase (1 year to retirement): At this point levels of risk should be dialled down. There is a need to move away from ‘one size fits all’ defaults and understand what members plan to do with their savings.
Commenting, Anthony Ellis, Head of DC Investment Proposition at Hymans Robertson, said: “Buoyed by the introduction of auto enrolment in 2012, Master Trusts now account for 35% of the workplace pensions market. The assets of over 7 million UK DC savers are now invested in these vehicles. Increasingly, Master Trusts are viewed as the DC vehicle of choice for employers - this is largely due to the attractiveness of fully outsourcing DC delivery but, at the same time, retaining the attractive features of occupational pension schemes. Coupled with economies of scale and the significant downward pressure on pricing, it’s easy to see why they have appeal and why the market is expected to grow to £300bn by 2026.”
“Until now there has been no recognised method of comparing relative value between the different Master Trust providers. Employers, and more importantly their people, should be able to clearly see that value.”
“In assessing performance, the sole focus mustn’t be on returns. It’s also vital to look at the amount of risk being taken at different stages of the savings lifecycle to ensure it’s appropriate throughout. Equally, fees should not be looked at in isolation; what should be examined is the relative value of those fees against what they deliver. Ultimately, if a higher priced strategy has generated a better member outcome relative to a lower cost strategy over the relevant period (after taking into account all fees) then that represents better value.”
Discussing how Master Trust providers fare in the growth phase, he said: “While the majority are taking enough risk, the focus on short term volatility reduction by some is costing members through lower long term net returns. In these cases this is likely to result in poorer member outcomes - those strategies that have embraced higher risk asset classes have outperformed the strategies with a heavy focus on risk mitigation (see table 1 below).”
Commenting on the results in the consolidation phase he said: “In the consolidation phase, where the focus should be on delivering solid returns but with a significant element of capital preservation and risk reduction, the picture is mixed. The data shows that some have delivered strong performance with commendably low levels of risk. Others have delivered lower risk but at the cost of lower (but still relatively strong) returns. While some have delivered strong returns but with high levels of volatility.”
Looking at the pre-retirement phase, he explains why risk should be dialled down: “Overall the market has delivered very strong returns for members close to retirement. On balance our view is that the majority of providers have carried too much risk in this phase. At this stage investment risk should de dialled down significantly and the investment strategy should be consistent with the member’s decision at retirement.
“At present, due to low fund sizes, for many this decision will be to take their benefits as cash. And statistics from the FCA Retirement Outcomes Review support this. Over 53% of DC pension pots accessed at retirement are fully withdrawn, and 90% of these pots are less than £30k in size. In this context it raises a question mark over exposing DC investors to market risk and market falls.”
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