Hymans: Master trusts too risky pre-retirement

Some master trusts are taking too much risk in the run-up to retirement while others are being too cautious in the growth phase, leading to potentially poorer outcomes, a Hymans Robertson report into the fast-growing sector concludes.

Research into the performance of master trusts carried out by the consultancy shows a wide difference in returns to date, reflecting the different strategies being adopted by schemes. Hymans Robertson says the focus on short term volatility reduction by some schemes is costing members through lower long term net returns, in the emerging master trust sector which it says is expected to grow to £300bn by 2026.

The report, comparing the investment performance of the biggest Master Trust providers’ default funds, accounting for 94 per cent of the market, examines each of the three main phases of DC investment – growth, consolidation and pre-retirement.

It concludes that, despite significant gains having been experienced to date, a result of benign investment markets, too much risk is being taken in the pre-retirement phase given the fact that 53 per cent of pots are being fully withdrawn at retirement.

Hymans Robertson head of DC investment proposition Anthony Ellis says: “In assessing performance, the sole focus mustn’t be on returns. It’s also vital to look at the amount of risk being taken at different stages of the savings lifecycle to ensure it’s appropriate throughout. Equally, fees should not be looked at in isolation; what should be examined is the relative value of those fees against what they deliver. Ultimately, if a higher priced strategy has generated a better member outcome relative to a lower cost strategy over the relevant period – after taking into account all fees – then that represents better value.

“While the majority are taking enough risk, the focus on short term volatility reduction by some is costing members through lower long term net returns. In these cases this is likely to result in poorer member outcomes – those strategies that have embraced higher risk asset classes have outperformed the strategies with a heavy focus on risk mitigation.

“In the consolidation phase, where the focus should be on delivering solid returns but with a significant element of capital preservation and risk reduction, the picture is mixed. The data shows that some have delivered strong performance with commendably low levels of risk. Others have delivered lower risk but at the cost of lower (but still relatively strong) returns. While some have delivered strong returns but with high levels of volatility.

“Overall the market has delivered very strong returns for members close to retirement. On balance our view is that the majority of providers have carried too much risk in this phase. At this stage investment risk should de 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 statistics from the FCA Retirement Outcomes Review support this. Over 53 per cent of DC pension pots accessed at retirement are fully withdrawn, and 90 per cent of these pots are less than £30k in size. In this context it raises a question mark over exposing DC investors to market risk and market falls.”