Commenting on the analysis, Shabna Islam, Head of DC Provider Relations, at Hymans Robertson, says: “As we reflect back on the last eighteen months, it is a welcome relief to see that the market low experienced in March 2020 are a bleak memory with outcomes improving throughout this year and remaining steady as we look forward to 2022.
“Despite this positive performance, we continue to observe clear differences in investment strategy across providers, which could lead to different outcomes for members in otherwise similar circumstances. We remain concerned, and apprehensive, that the continued rise of inflation - significant increases to cost of living basics such as food and fuel - will ultimately impact member salary growth.
“With the trend of schemes switching to Master Trusts continuing to grow, there is an increased need for effective monitoring and a detailed comparison of providers to ensure long term successful outcomes for members.”
The analysis in the report looked at the three main stages of the savings journey – growth (more than 15 years from retirement), consolidation, (5 to 15 years from retirement) and pre-retirement (within 5 years of retirement).
Discussing how Master Trust providers fare in the growth stage, Shabna says: “In the growth phase, retirement can feel a long way away for members allowing them to take more risk, since any short-term losses are unlikely to have a significant impact on their expected income in retirement. Our analysis of the growth stage in Master Trust indicates that growth fund performance has been strong, with providers returning at least 6% p.a. and double-digit performance not uncommon, particularly for those running high equity strategies. There are clear differences in the level of diversification used in this phase, as evidenced by the wide range of volatilities returned by the providers.”
Commenting on the results in the consolidation phase, Shabna says: “In the Consolidation Phase, Master Trust default funds have been generally strong but differences in strategy have led to wide dispersion in returns, which range from 4% to 10% p.a.
Given the market volatility at the start of the pandemic, the majority of providers have exceeded the normal volatility range, 6-8% p.a., which we would expect in this stage. Protecting against a negative downturn is important as members approach retirement, given the shorter time frame to recover from any market falls. Our research reveals that the level of uncertainty varies significantly across providers, leaving members vulnerable to any reductions.”
Looking at the pre-retirement phase, Shabna explains why risk should be dialled down: “Differences in the pre-retirement phase are clear with a wide variation in performance, and risk, across providers with differences of up to 9% p.a. between funds.
Volatility has been higher than we would typically expect to see for those approaching retirement, and investment strategies must be aligned to member decisions at retirement. More cautious investment strategies mean the range of outcomes can lead to very different levels of risk. Members closer to retirement may need guidance about what higher inflation means for their plans and how their investment strategy will protect the real value of their savings.”
Commenting on the different investment strategy variations, Shabna continues: “As we look towards 2022 our belief remains unchanged – we expect risk to be rewarded for members with many years until retirement, and strongly support a more cautious risk approach for those where retirement is closer. Our research shows there are a range of approaches adopted by providers supporting different member outcomes and this is key for those at different stages of their journey.
“The past year has allowed the Master Trust market to remain steady, and it is a welcome relief after the turbulence of last year. We continue to observe clear difference in investment strategy and it is vital members remain aware that the impact this, combined with inflation, can have on fund performance. Providers should continue to engage with their members, through their DC and engagement strategies, to ensure that members are aware of what level of income will be needed in retirement and more importantly, the likelihood of meeting this target.”
A copy of the Master Trust Default Fund Review is here.
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