Key points
At a glance:
- Hymans Robertson has analysed master trust default fund performance for three retirement phases
- Now Pensions’ default funds delivered worst investment returns across all three phases
- Mercer performed best in first two phases; The Pensions Trust best performer in last phase
Hymans Robertson has unveiled research analysing investment performance across the 16 largest master trust default funds. Kim Kaveh explores the data.
There are many factors to take into consideration when choosing the right master trust to help members reach good retirement outcomes, such as security, value for money, and investment strategy.
Investment returns vary considerably across the UK's biggest master trusts, according to new research. Hymans Robertson's Master Trust Default Fund Performance Review unveiled on 25 September focuses on three-year performance of 16 master trusts in three phases using data up to 31 March 2018; the growth phase, consolidation phase, and the pre-retirement phase.
In the growth phase, which Hymans Robertson refers to as "30 to five years to retirement", the lowest performer was Now Pensions, which delivered 2.06% returns over three years, followed by Standard Life DC Master Trust and StanPlan at 3.54%, and Friends Life Master Trust at 6.60%.
The scheme that performed the best in this respect was the Mercer Master Trust with 8.10% returns over three years. This was followed by the Scottish Widows Master Trust at 7.99% and TPT Retirement Solutions at 7.74%.
In the consolidation phase (five years from retirement), a similar story played out for Now Pensions and Standard Life DC Master Trust and StanPlan, which delivered 1.26% and 2.70% returns over three years respectively, followed by NEST with 6.10% returns. The best performers were the Mercer Master Trust with 7.30% returns, National Pensions Trust with 7.27%, and the Legal & General WorkSave Master Trust and RAS Master Trust with 6.71%.
In the pre-retirement phase (one year before retirement) Now Pensions was at the bottom of the board once again, with 0.66% returns over three years. This was followed by Friends Life Master Trust with 0.90% returns, and Standard Life DC Master Trust and StanPlan with 1.57% returns.
The best performers were National Pension Trust (7.27%) and the Legal & General WorkSave Master Trust and RAS Master Trust (6.71%), and The People's Pension (6.36%).
Solutions
According to Hymans Robertson's report, in the growth phase short-term risk mitigation through diversification of asset class or active asset allocation is of "questionable value". Regular contributions by the member provide their own diversification benefit as a result of pound cost averaging, it adds.
"Funds are relatively small, any volatility of performance is typically short term in nature and has a negligible effect on long-term outcomes (markets recover, with members having purchased units at lower cost).
"Recent history has been kind to risky asset classes. But even when the tide turns and a more cautious approach shows short-term (relative) outperformance, over the long term, it is very unlikely that such an approach will lead to better member outcomes than a high allocation to riskier asset classes."
Meanwhile, for the consolidation phase, the consultancy's report says a focus on short-term risk and protecting against negative returns becomes much more important.
"With only five years to go, a member's final outcome could be significantly impacted by market downturns. The remaining contributions left to be paid could be insufficient for a member's fund to recover any market-driven loss."
For the pre-retirement phase, the consultancy says this is where risk should be dialled down significantly and the investment strategy should be consistent with the member's decision at retirement.
"At present, due to low fund sizes, for many this decision will be to take their benefits as cash and therefore protection against negative returns is even more vital."
Commenting on the results, Hymans Robertson head of DC scheme design and provider evaluation Jesal Mistry, who also authored the report, says: "This type of report can help the industry in the long term and help trustees assess whether their pension arrangement is meeting their objectives and improved member outcomes."
He adds that while even a three-year time horizon is too short, the consultancy's aim is to gradually move the focus from short-term performance to longer-term metrics on member outcomes and risk-adjusted performance.
"In the meantime, the analysis in this report is already demonstrating variation in performance (and hence member outcomes). Over a longer-time horizon, it would be quite difficult to justify the "value for money/member" proposition if performance variation is still significant."
Reaction
In response to Hymans Robertson's report, Now Pensions director of investment and product development Rob Booth said the market dynamics over the three-year period to March 2018 are characterised by a strong equity "bull run", coupled with a depreciation in the value of sterling.
"As Hymans rightly say in the report, ‘Recent history has been kind to risky asset classes'. The relative three-year performance figures for the diversified growth fund which targets long-term, sustainable growth come as no surprise.
"Although Now Pensions will always focus on medium to long-term performance, it is good to see the strong one-year performance of our diversified growth fund coming through."
The master trust's one-year return for the growth phase performed the best across the board, with a 3.90% return rate.
NEST director of investment development and delivery Paul Todd says: "NEST's latest default investment performance, five years out from retirement and over a three-year period, is in fact 8.6%.
"Investment return is, however, only one part of measuring performance. NEST is consistently one of the highest performers when compared to other master trusts in terms of risk-adjusted returns, which is a much stronger assessment of performance."
A spokesperson at Standard Life Aberdeen further notes: "Our focus is on the long term and ensuring that our default option is likely to deliver the returns that members need, at a level of risk that members are willing and able to take, as consistently as possible.
"We believe that our default investment option has done this in the longer term and, through ongoing monitoring and review, we will seek to ensure that it continues to do so in an ever-changing environment."
