Master trust default funds have recovered quickly following the stock market falls earlier this year, but could still be vulnerable to further Covid-related economic shocks, according to new research from Hymans Robertson.
Its 2020 Master Trust Default Report shows that retirement outcomes for members saving in these default funds is likely to be ‘back on track’ relative to their position at the start of 2020.
However the consultancy claims future market shocks could have a significant impact for older members, who are within 15 years of retirement.
The report shows that there are a range of investment approaches adopted by providers for those in the ‘consolidating’ phase, that is between five and fifteen years from retirement, and those in the pre-retirement stage (within five years of retirement).
Much of this depends on whether the trust is targeting an annuity or income drawdown at retirement. Hymans Robertson says that providers need to carefully consider the time horizon of their members and the economic conditions as they assess their strategy in order to ensure adequate support for members.
For those in the growth stage (more than 15 years from retirement) the market turmoil of early 2020 has been masked by generally positive three year performance, with providers typically returning between 3 and 5 per cent a year for members.
Returns for the consolidation phase have mirrored the growth fund performance, again with returns in the 3-5 per cent per annum range.
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.
In the pre-retirement stage returns have been generally strong but lie within a reasonably wide range of between 1 and 5 per cent per annum, reflecting differences in approach.
Hymans Robertson lead digital consultant, for DC pensions Darren Baillie 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, it’s 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.”
He adds: “For those in the growth stage riskier strategies may offer higher expected returns, they leave members close to retirement vulnerable to market shocks which could significantly reduce their pension.”
Commenting on the volatility seen in the pre-retirement phase Baillie adds: “For most providers, the level of volatility delivered for members has been higher than we would generally expect to see during the pre-retirement 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.”
He adds: “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.”
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