The research, which analyses the investment returns, volatility and asset allocation strategy of default funds through growth, derisking and immediately pre-retirement, found that investors five years from state retirement age saw average annualised returns of 7.24 per cent.
The findings – published in Corporate Adviser’s Master Trust Defaults Report – show performance between master trusts varies significantly, particularly in outright terms but also when adjusted for risk. There is a 30 per cent difference between the best- and worst-performing master trust defaults over three years. Now: Pensions has delivered a cumulative return of just 7 per cent to members over the three years to 31.3.18, compared to 37 per cent delivered by Supertrust UK to its members over the period, and 23 per cent returned by the average master trust.
The research introduces the Corporate Adviser Pensions Average (CAPA) Index – a new benchmark for default fund performance. The (CAPA) Index is the average (mean) return delivered by defaults known to us, over set time frames. It covers the performance of the strategies of more than 95 per cent of the entire master trust market, as well as those of key life insurers active in the provision of workplace pensions.The CAPA Index reflects data from 28 master trust and life office providers, representing default funds covering more than 12 million members, and assets of more than £25bn.
The research shows most master trust defaults have delivered returns around the CAPA Index level, but with different levels of risk. The report finds master trust defaults have widely varying approaches to asset allocation. Equity exposure for the growth phase ranges from 37 per cent to 100 per cent. The average growth phase equity exposure is 74.6 per cent.
It shows approaches to derisking vary greatly – with derisking starting 25 years before retirement for some schemes, while one scheme has no derisking at all. The report looks at asset allocation, approach to holding cash at retirement, and the size of funds by number of members, assets and employers.
Corporate Adviser editor John Greenwood says: “Master trusts have, through auto-enrolment, been entrusted with a huge societal responsibility. Yet despite the crucial role they play in shaping the retirement fortunes of millions of Britons, scrutiny of their performance has been virtually non-existent. This research aims to rectify this by shining a light on the investment strategies being adopted by defaults within master trusts and analysing the results they have achieved.
“This report represents the deepest and most transparent benchmarking of the performance, asset allocation and structure of master trust defaults yet conducted in the market, covering, we believe, well in excess of 95 per cent of the sector by assets and members. It has been conducted with a view to facilitating a deeper debate about what is working and what isn’t, what best practice looks like and how the industry could do better.
“The report comes with caveats. The comparison tables and the CAPA Index are only part of the picture when it comes to judging whether a scheme is good or not, and at launch this report is only a single snapshot in time, meaning extra caution is required. Being below the CAPA Index does not mean a scheme is failing. In different markets the position of schemes above and below the CAPA Index could easily be reversed. Return data alone is nothing without considering risk. The CAPA Index should be read in conjunction with the variety of other performance metrics available to professionals analysing default funds. However, the CAPA Index may help identify outlier strategies, and will serve to flag up issues where schemes fall significantly behind their peers. As time passes and our data set grows, consistent significant underperformance of the CAPA Index benchmark through multiple parts of the economic cycle should start to raise concerns amongst trustees, IGCs, advisers, employers and ultimately members.”
NB: Certain graphs in the print version of this report have been inaccurately labelled. Please refer to the PDF version copy for the corrected version of the report.