Articles - Master Trust default funds recover quickly after COVID

DC Master Trust default funds have seen the value of investments shoot up over the last 12 months despite the market crash at the start of the pandemic, according to analysis from Hymans Robertson. Its latest Master Trust Default Fund Report shows that retirement outcomes for Master Trust pension scheme savers not only recovered but improved over the year.

 By Shabna Islam, Head of DC Provider Relations, at Hymans Robertson
 However, with an estimated 50% of workplace pensions scheme savers now in a Master Trust, the leading pensions and financial services consultancy warns that there is wide variation in the level of investment risk being taken by members.
 “The last year has been a year unlike any other. The Covid-19 pandemic brought many challenges to Master Trust default funds, yet it is encouraging that, in general, member outcomes improved over the course of 2020 and the recovery has continued during the first few months of this year.
 “Despite this positive performance, we remain concerned about investment strategy differences across Providers. It is important for Providers to address members’ investment needs at different stages of their savings journeys.”
 The analysis in the report looked at the three main stages of the savings journey – growth (more than 15 years from retirement), consolidation, (5 to 15 years from retirement) and pre-retirement (within 5 years of retirement).
 Discussing how Master Trust providers fare in the growth stage
 “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% p.a. returns and some as high as 8% p.a. returns. Fund volatilities have typically been 10%-15% p.a. which are consistent with the high equity allocations expected at this stage.”
 Results in the consolidation phase
 “In the Consolidation Phase, Master Trust default funds have performed well given the economic challenges over the pandemic, with returns of 3%-5% p.a. But future market changes may impact performance and, while riskier strategies may provide higher returns over the long-term, Providers should be mindful that, as members approach retirement, more caution is required because members have less time to recover from a market fall.”
 Pre-retirement phase
 “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% 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.”
 Different investment strategy variations
 “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.”
 A copy of the Master Trust Default Fund Review can be accessed here.

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