DC master trust default funds have recovered faster than expected after the initial Covid crash according to analysis by Hymans Roberston.
The value of investments have increased significantly over the last 12 months despite the market turbulence at the start of the pandemic. Hymans Master Trust Default fund Report shows retirement outcomes for savers have not only recovered but improved over the year.
However Hymans warns there is still significant variation in the level of investment risk being taken by members, at both the growth and pre-retirement stages.
Hymans, head of DC provider relations Shabna Islam says: “Despite this positive performance, we remain concerned about investment strategy differences across providers.
“In the growth phase, members are a long way from retirement and can afford to take 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 default funds showed that, over the last three years, there was notable dispersion in performance, with some providers achieving as low as 2 per cent p.a. returns and some as high as 8 per cent p.a. returns. Fund volatilities have typically been 10 per cent to 15 per cent p.a. which are consistent with the high equity allocations expected at this stage.”
Islam adds: “Returns in the pre-retirement phase have been generally strong over the last 3 years but there is wide variation in performance, with differences of up to 6 per cent p.a. between funds.
“Volatility has been higher than we would typically expect to see for members approaching retirement, since funds should be protecting members’ assets from market fluctuations. However higher volatilities are perhaps unsurprising, given recent market events.”
Commenting on the different investment strategy variations, Islam adds:“We believe risk will be rewarded for members with many years until retirement. For those closer to retirement, risk reduction should be the norm but investment strategy should also be aligned with how members’ are likely to take their retirement income. The range of approaches adopted by providers have resulted in notable differences in investment growth and may indicate that some members are assuming inappropriate levels of risk.
“The past year has been bumpy, and it is a welcome relief to see positive fund performance as the market recovers. However, we urge all providers to continue to engage with their members to ensure they are aware of what stage of the retirement journey they are on, and that the level of risk they are assuming is consistent with their retirement goals.”
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