Master trust default funds recover 'surprisingly quickly' following Covid-19 volatility

Master trust default funds have recovered “surprisingly quickly” since the Covid-driven lows in March, analysis by Hymans Robertson has found, with retirement outcomes for members in master trusts likely back on track.

The analysis in the Master Trust Default Fund Review report looked at three stages of the retirement journey, growth, consolidation and pre-retirement.

In particular, it noted that for those in the growth stage, the market volatility driven by the pandemic earlier this year had been “masked” by generally positive two-year performance, with providers having typically returned 3-5 per cent per annum.

This was also mirrored in the consolidation phase, with providers generally having exceeded the risk range normally associated with this phase, which the firm said was due to the heightened market volatility seen amid the pandemic.

Hymans Robertson warned however, that any future shock to markets could have a “significant impact” on older members, emphasising that there are a range of investment approaches, with some expected to support better member outcomes than others.

It urged providers to carefully consider the time horizon of their members and the economic landscape when assessing their strategy, warning that members may otherwise face some tough decisions.

The firm noted that whilst pre-retirement returns have generally been strong, they have sat in the "reasonably wide range" of 1-5 per cent per annum, which reflects the differences in approach across providers, such as whether the default strategy targets cash or drawdown.

Hymans Robertson lead digital consultant for DC, Darren Baillie, explained that whilst the level of volatility delivered in this phase has been higher than usually expected, this was perhaps unsurprising in the context of the current market events.

However, he also stated that there is evidence that members in this phase could be assuming very different and potentially inappropriate levels of risk, stressing that engaging with members in their retirement planning at the right time is "crucial”.

He commented: “2020 has been a year like no other. The Covid-19 pandemic has brought numerous challenges to master trust default funds so it is encouraging that markets have regained ground so swiftly since their lows in March.

“Despite this, we aren’t out of the woods yet and, against the backdrop of a second wave of the virus, differences in investment strategy have an impact on member outcomes.

“So, its vitally important for providers to address the variations in members’ investment needs at the different stages of their savings journey."

Baillie added: “Our core belief is that we expect risk to be rewarded over the long term and advocate effective risk management to support good outcomes for those closer to retirement.

"The range of approaches adopted by providers is, therefore, concerning.

“Insufficient levels of risk for younger members will adversely impact their potential to achieve good outcomes over the long-term.

"For members approaching retirement, providers need to ensure their approach remains appropriate, and guide members to select the best path for their circumstances.”

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