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Master trusts taking too much risk in run up to retirement

Pension-pot-700.jpgThe risk profiles of many default master trust funds at the start and the end of the retirement journey need an overhaul, recent research by Hymans Robertson reveals.

With master trust arrangements accounting for 94 per cent of the UK market and representing seven million people’s pensions arrangements, the consultancy has interrogated their risk exposure at the accumulation, consolidation and decumulation phases of retirement.

In many trust arrangements at the growth – or accumulation – phase, insufficient risk is being taken, which could impede member outcomes.

Hymans Robertson head of DC investment proposition Anthony Ellis says: “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.”

He says: “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.”

Source: Hymans Robertson

The group says focusing on short-term risk mitigation is of “questionable value” so far away from retirement.

Conversely, while the market has delivered strong returns for members nearing retirement, Ellis believes default schemes in this phase have carried too much risk, which could lead to problems should market volatility pick up and that the ‘one-size-fits-all’ approach is no longer suitable.

He says: “At this stage investment risk should de dialled down significantly and the investment strategy should be consistent with the member’s decision at retirement.”

Source: Hymans Robertson

Hymans Robertson adds that currently, smaller fund sizes are prompting savers to opt for cash withdrawals – over 53 per cent of DC pensions pots accessed at retirement are fully withdrawn. Of these, 90 per cent are less than £30,000 in size.

Ellis says: “In this context it raises a question mark over exposing DC investors to market risk and market falls.”

Hymans Robertson cites the desire to outsource and the introduction of auto-enrolment as having spurred growth over the past five years, with master trusts now “the vehicle of choice” for many employers.

With 35 per cent of workplace pension schemes now in master trust arrangements, they are expected to grow to £300bn in assets by 2026, according to the consultancy.

During the consolidation phase – up to five years from retirement – Hymans Robertson says the focus should shift to capital preservation, solid returns and risk reduction.

“In the consolidation phase…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.”

Source: Hymans Robertson

Just days after the Department for Work and Pensions released the findings of its survey on pensions charges Hymans Robertson flags the importance of looking at fees in relation to performance and neither as standalone features.

Ellis adds: “In assessing performance, the sole focus must not be on returns.

“It is also vital to look at the amount of risk being taken at different stages of the savings lifecycle to ensure it is 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.”

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