Master trusts default funds have held on to their post-lockdown growth during 2021 delivering steady returns for members according to Hymans Robertson’s latest research.
However its Master Trust Default Fund report says concerns remain about inflation and future salary growth — both of which it says should be taken into account when making investment decisions and looking at future retirement outcomes for members.
Hymans Robertson head of DC provider relations Shabna Islam says: “As we reflect back on the last eighteen months, it is a welcome relief to see that the market lows experienced in March 2020 are a bleak memory with outcomes improving throughout this year.
“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 – and the significant increases to cost of living basics such as food and fuel – will ultimately impact member salary growth.”
Islam says that with consolidation in the DC sector increasing and more schemes switching to master trusts, there was an increased need for effective monitoring and a detailed comparison of providers to ensure long term successful outcomes for members.
Hymans said that its analysis of master trusts defaults showed that in the growth stage performance remained strong, with providers returning at least 6 per cent per annum, and double-digit performance not uncommon, particularly for those running high equity strategies. However Islam says there are clear differences in the level of diversification used at this stage.
These differences are accentuated in the ‘consolidation’ stage — between 15 and five years from retirement. Hymans says there is a “wide dispersion in returns” which range from 4 to 10 per cent per annum.
Islam says: “Given the market volatility at the start of the pandemic, the majority of providers have exceeded the normal volatility range, 6-8 per cent 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.”
There was similar variation in both performance and risk when it comes to the pre-retirement phase — within five years or retirement age — with differences of up to 9 per cent per annum between providers.
Islam says: “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. 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.”
Hymans Roberston says that as it look towards 2022 the company’s belief remains unchanged – in that it expects risk to be rewarded for members with many years until retirement, although the company strongly strongly supports a more cautious risk approach for those where retirement is closer.
A copy of the Hyman’s Master Trust Default Fund Review is available here.
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