Equities are, not surprisingly, the driving force behind the growth phase asset allocation strategies of master trust defaults. Trustees have to balance their knowledge and understanding of the assets most likely to outperform over several decades with the variety of risk tolerances that will exist across their member population. Equities have almost always beaten other classes over periods in excess of 20 years. And while equities are more volatile than other asset classes, pension savers also benefit from pound/ cost averaging.
Equity exposure for investors 30 years from state pension age (SPA) averages 74.6 per cent across schemes (as at 31.3.18), made up of 15.6 per cent UK equities and 59 per cent overseas equities. Supertrust UK has the highest exposure, at 100 per cent, for the growth phase, boldness that rewarded it, not surprisingly in a rising market, with the highest 5-year annualised returns in the market. Legal & General’s default equity exposure stands at just 3 per cent in the growth phase. This has held this less volatile fund back its returns in the bull market of recent years.
To see the asset allocation of each of the master trusts, at 30 years, 5 years and one day before retirement, see the individual provider pages.
The extent to which defaults diversify their portfolio varies greatly – with several defaults invested in only equities plus one or two other asset classes through the growth phase, while others offer a more diversified strategy. Those with a more diversified approach sit towards the lower risk end of the risk/return tables.
Legal & General’s well-diversified multi-asset approach – it invests in Gilts, index-linked bonds, corporate bonds, UK and overseas equities, property and other asset classes – means it should stand up well to stormy markets. The question for trustees is how important is volatility on the savings journey, compared to eventual fund value. Nest’s relatively low equity exposure of 57 per cent has not stopped it achieving returns on a par with schemes with higher equity content, with a lower level of risk. It invests in a diverse range of asset classes and says its bond exposure adds return-seeking elements to its portfolio by investing for growth in emerging market debt and high yield bonds.
Now: Pensions operates a different strategy to the rest of the pack through its diversified growth fund managed by a subsidiary of parent, ATP. Now’s default operates a risk parity strategy, an approach used by hedge funds, where allocation is determined by risk and return levels rather than holdings in the assets themselves, which is why it has not been included in the asset allocation table here. It targets a 60/40 equity/bond strategy risk profile, but uses derivatives to do so, leveraging the fund by 200 per cent or more.
The BCF master trust, which is a faith-based scheme for members of the Plymouth Brethren community, achieved the lowest returns in the group. It does not invest in equities for religious reasons. The scheme, which has master trust assurance framework accreditation, is offered by employers who are Plymouth Brethren to employees who share their faith. Employees who are not Plymouth Brethren are offered an alternative non-faith based scheme.