DC providers urged to stay focused on default risk management

Defined contribution (DC) pension providers must continue working on the risk management of their default funds in the wake of the pandemic, according to an annual survey from Punter Southall Aspire.

The business’ 2021 DC Default Strategy Survey report, which examined the performance of DC default funds from nine major providers over the last three years, stated that volatility caused by Covid-19 had also highlighted the need for schemes to be “nimble enough to make the right decisions at the right time”.

The report added that, due to their diversified nature and management of exposure to risk, it had been unsurprising that DC defaults had managed to outperform global equity markets in periods of decline and underperformed in periods when equity markets had strengthened.

It found that DC defaults that were equity-driven were the hardest hit by the pandemic in March 2020, but also the group that benefitted most from the subsequent rebound.

Conversely, lower risk and more diversified defaults managed to protect themselves better in March 2020 but had reduced exposure to markets which recovered well over the following 12 months, with the report noting that they may not have taken advantage of overseas equity markets.

Even so, Punter Southall Aspire said it continued to believe that “a well-diversified portfolio, including an exposure to higher risk investments would, in the normal course of events, be expected to provide good long-term returns”.

Punter Southall Aspire associate director, Christos Bakas, commented that providers would need “to decide whether catering to the flexible needs of pensions freedoms is worth the added risk to which members are exposed” and ensure that “members are much better educated on the need for continued equity exposure once they have started drawing benefits”.

The firm also called for providers to look at addressing climate change as a top priority, arguing that they could face a potential portfolio value loss of trillions due to the effects of rising temperatures and advocating for a shift towards low-carbon investments.

Bakas commented: “The most common phrases we heard about investment markets in 2020 include words such as 'torrid', 'unprecedented' and 'shock'.

“After nearly 12 years of positive stock market returns, the 20 per cent plus falls in March 2020 came as a shock for many, especially those nearing retirement age. Suddenly, savers were nervously checking their pension values and seeing negative figures which they hadn’t experienced since 2008.

“For those approaching retirement, it was hoped that the design of default investment strategies would help reduce the impact of big stock market falls.

“Our annual survey reveals what 2020 has meant for the pension savings provided to employees and pension scheme members, by reviewing the performance of the major pension providers in the DC market over the medium and longer term.”

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