Isio’s Q2 DC default review, After the Storm, analysed the performance of a selection of the leading Master Trusts’ default strategies available to UK DC members as at 30 June 2020.
The research found that younger members who are around 30 years out from retirement benefitted most from the recent boost in markets, seeing their pot sizes increase between 10.5% to 19.9% over the second quarter.
Equity-driven strategies had the best performance, especially those with lower UK equity allocations, as overseas markets recovered the majority of their Q1 losses. Given the pensions of early-career members tend to be more exposed to higher risk assets such as equities, the recovery here has had a positive impact for younger people.
Diversified strategies did not fare quite as well given the equity-led rally, but still delivered strong double-digit returns.
Isio’s analysis showed that late-career members (those with two years until retirement), who are most at risk in the event of a sudden market downturn, also recovered much of their Q1 losses with longer term returns now averaging 4.3% per annum.
More defensive strategies with higher gilt and cash allocations lagged riskier growth strategies but still delivered positive returns.
Meanwhile, the impact of automatic de-risking in lifestyles and target dated funds helped preserve capital for older members whilst still generating positive absolute returns.
George Fowler, partner at Isio, commented: “It is about time we had some good news, so it is great to see pension pots recovering following the dismal first quarter. The data is particularly good news for younger people who have seen some great returns of up to 20%.
“While the forecast for the rest of the year remains uncertain, our latest report shows the wisdom of a long-term view. Short-term stresses such as the continued impact of the pandemic with the threat of a second spike, the end of the furlough scheme in the UK and the forthcoming US elections all have the potential to disrupt the pension savings of UK workers. However, we have already seen how a calm and long-term approach, can help pensioners weather the storm.
“Staying mindful of where members are in their pension journey remains key. Whilst younger members may be able to ride out the threat of another storm ahead, older investors with one eye on retirement should make sure they steer a safer course.”
Isio’s Q1 DC default review showed that older members’ pension savings declined by 8.7% on average in the first three months of the year, while younger members saw their pots lose between 13.2% and 20.8%.
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