• Default funds have recovered quickly but remain vulnerable to the impact of a second wave.
• Range of different approaches from funds is a concern for members.
• Greater need to monitor and compare providers, differences could materially influence member outcomes. 

Master Trust default funds have recovered surprisingly quickly since Covid-19 related lows in March, according to analysis published today by Hymans Robertson. The 2020 Master Trust Default Report shows retirement outcomes for members in Master Trusts are likely to be back on track, relative to their position at the start of 2020.

However, the leading pensions and financial services consultancy warns that any future shock to markets could have a significant impact for older members. The report shows there are a range of investment approaches adopted by Master Trust providers, with some expected to support better member outcomes than others. Providers need to carefully consider the time horizon of their members and the economic conditions as they assess their strategy. Otherwise, some members, particularly those nearing retirement, might face some tough decisions.

Commenting on the analysis, Darren Baillie, Lead Digital Consultant for DC Pensions at Hymans Robertson, says:

“2020 has been a year like no other. The Covid-19 pandemic has brought numerous challenges to Master Trust Default Funds so it is encouraging that markets have regained ground so swiftly since their lows in March. Despite this, we aren’t out of the woods yet and, against the backdrop of a second wave of the virus, differences in investment strategy have an impact on member outcomes. So, its vitally important for providers to address the variations in members’ investment needs at the different stages of their savings journey. Younger members have time on their side and our analysis shows they can afford to take short term risk and target long term returns. For members closer to retirement, more caution is needed and the objective should be to reduce risk in a way that helps them protect their pension and meet their retirement goals.”

The analysis in the report looked at the three stages of the retirement journey – Growth (more than 15 years from retirement), Consolidation, (5 to 15 years from retirement) and Pre-retirement (within 5 years of retirement).

For those in the growth stage, the market turmoil of early 2020 has been masked by generally positive 3-year performance and providers have typically returned c.3-5% p.a.

Darren comments: “In the growth phase, members are a long way from retirement and a strategy targeting attractive long-term returns, rather than managing short-term risk, is likely to lead to the best outcomes for members.”

Returns for consolidation phase members have mirrored growth fund performance, with providers typically returning c.3-5% p.a. The analysis shows providers have generally exceeded the risk range normally associated with this phase, which could be explained by the heightened market volatility of early 2020.

Darren’s view is that “while riskier strategies may offer higher expected returns, they leave members close to retirement vulnerable to market shocks which could significantly reduce their pension.”

Pre-retirement returns have been generally strong but lie within a reasonably wide range of 1-5% p.a., reflecting differences in approach across providers such as whether the default strategy targets cash or income drawdown.

Commenting on the volatility seen in this phase, Darren says: “For most providers, the level of volatility delivered for members has been higher than we would generally expect to see during this phase, but that perhaps isn’t surprising in the context of recent market events. There is evidence that members in this phase could be assuming very different and potentially inappropriate levels of risk. Engaging with members in their retirement planning at the right time is therefore crucial.”

Commenting on the different investment strategy needs, Darren continues:

“Our core belief is that we expect risk to be rewarded over the long term and advocate effective risk management to support good outcomes for those closer to retirement. The range of approaches adopted by providers is, therefore, concerning.

“Insufficient levels of risk for younger members will adversely impact their potential to achieve good outcomes over the long-term. For members approaching retirement, providers need to ensure their approach remains appropriate, and guide members to select the best path for their circumstances.” 

A copy of our Master Trust Default Fund Review can be accessed here.