Poor performing master trust defaults could leave savers over £440k worse off

The difference between the best and worst-performing master trust defaults could see a disparity in pension savings at retirement of £442,000, according to analysis by River and Mercantile.

The firm emphasised that investment strategy is “fundamental” to defined contribution (DC) savings, acting as a key driver in whether members will retire rich or poor.

Its analysis found that there was a 5.5 per cent per annum difference between the best and worst-performing master trusts over five years ending 31 March 2020, equal to a difference of £235,000 in pot size at retirement.

This increased when reflecting more recent performance, with the same analysis over five years to 30 June 2020 revealing a larger “and more meaningful” difference of around £442,000 in retirement pot size, equal to around £305 per week in pension.

The firm stated that whilst these may seem like “extreme examples”, they are narrower then in recent years, with a gap of 9 per cent per annum for the five years ended 30 June 2019.

It also emphasised that the market shock experienced earlier this year has further put into context the risk members face.

For instance, it noted that whilst markets have moved back since the market volatility seen in March, there could have been members looking to take their benefits at the end of March.

Considering this, it warned that the damage to these members' pots would have been “lost forever”, or that retirement plans might have needed to change.

River and Mercantile added that the Covid-prompted volatility, alongside growing pressure from The Pensions Regulator, could lead many companies to evaluate their DC vehicle of choice, and potentially move to master trusts.

River and Mercantile head of DC solutions, Niall Alexander, stated: "We believe DC members should not have a wide range of outcomes. Instead, members should get a sufficient level of income that is insulated against market movements.

"A little more potential upside from markets is great, but the consequence of getting it wrong on the downside can be profound.

He added: "Whether single employer trust or master trust, pensions adequacy for DC members saving at retirement continues to be a major issue despite industry developments in recent years.

"Contributions, retirement age and investment strategy are the three key levers of DC provision.

"Typically, contributions and when members retire are largely fixed (or difficult to control) which places a greater onus on trustees to ensure the investment strategy is fit for purpose."

The analysis was based on data from Capadata, and assumes a 25-year-old with a starting salary of £25,000 invested for 40 years with a contribution rate of 8 per cent, whilst the weekly amount lost is based on single life annuity rates as at 15 October 2020.

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