Millions of savers in auto-enrolment default funds are experiencing significantly lower levels of risk-adjusted return because of the wide variance in structure of master trust and life office investment strategies, Corporate Adviser research shows.
The most in depth analysis of performance in the master trust and broader auto-enrolment market to date shows most defaults have performed well in the three years to June 30, 2017, achieving annualised returns of between 9 and 12 per cent and annualised risk of between 7 and 9 per cent.
But Now: Pensions has achieved abysmal performance over the period, with three-year annualised returns of just 2.82 per cent, barely keeping pace with inflation over a period when stockmarkets have soared. Now: Pensions’ annualised risk over the period was, at 7 per cent, lower than most providers in the sample, but Nest’s was only marginally higher at 7.16 per cent, yet it managed to achieve annualised returns of 11.84 per cent. Now: Pensions says it failed to benefit from the post-Brexit market bounce because of its currency hedging, although other providers say they too have currency hedging in place but still managed decent returns.
The best performer in the sample over the period in purely return terms is JP Morgan, whose SmartRetirement 2040 Fund returned 12.34 per cent annualised. The research shows that target date funds have generally performed well. AllianceBernstein’s target date fund achieved annualised returns of 11.8 per cent with a risk score of 8.8, while its ethical version achieved a healthy 10 per cent, with lower risk of 8.4 per cent.
Standard Life’s default has lagged the pack over the period, achieving an annualised return of 6.51 per cent, albeit with a considerably lower risk of 5.22 per cent. However, Standard’s growth fund still lags Nest’s foundation phase, which achieved a higher return of 8.95 per cent with annualised risk of 5.11 per cent, the lowest risk in the sample.
Nest achieved the highest Sharpe ratio over the period, while Now’s was the lowest.
About the research
The Corporate Adviser research builds on earlier figures compiled by Punter Southall Aspire, which looked at the 9 biggest life office default funds over the same period, the three years to the end of June 2017. Corporate Adviser has requested similar figures for this time period from all of the 22 master trusts that appear on the Master Trust Assurance Framework list on the Pensions Regulator’s website, as well as Now: Pensions, which took itself off the list earlier this year. Master Trusts on the list have all been independently reviewed as meeting ICAEW master trust assurance standards.
Figures were not sought for three life office master trusts – Legal & General WorkSave Master Trust Pension Scheme, Standard Life DC Master Trust and the Zurich Master Trust – as these providers are covered in their contract-based arrangement.
What we asked, and why caveats are needed
Comparing default funds is complex. Different charging structures, contribution rates, target customer audience, benchmarks and derisking strategies mean like-for-like comparisons are difficult to achieve. Furthermore, three years is not a long enough investment period to draw too many conclusions about any fund. Since the inception of auto-enrolment markets have been in a benign state of growth. Many of the providers whose funds are languishing at the bottom of the three-year performance tables contained in this research would rightly argue that the tables would look very different if markets had behaved differently.
Charges area also a hugely complicating factor. Nest’s figures are shown net of the 0.3 per cent ongoing charge. Nest’s 1.8 per cent contribution charge, which reflects pension administration, is not factored into the calculation. Master trusts were asked to give data net of investment charges, or if investment charges and admin charges are bundled, net of an assumed 0.3 per cent investment charge. To avoid the complexities of lifestyling, providers were asked to give figures for the growth phase of their defaults.
It could also be argued that there are better measures for comparing default fund performance than annualised risk and Sharpe ratio. The industry has work to do in deciding how best to measure whether funds are delivering for members.
The list of caveats to the research is long, reflecting the complexity of the market, but this does not mean this research is not worth carrying out. This research is a valuable first step at benchmarking performance in the auto-enrolment default sector, highlighting areas of good practice and shining a light on some instances of real concern. Future research will seek to extend understanding of master trust and contract-based defaults.
Not included because they do not have a three-year track record to June 2017:
LifeSight (Willis Towers Watson)
AutoEnrolment.co.uk (Smart Pension)
Not included because has multiple offerings rather than a single default master trust:
Failed or refused to supply data:
What the research tells us about transparency in the master trust sector
Another lesson to be taken from the research is the extent to which there is a culture of opacity amongst some master trust operators. Requests for data from FCA-regulated providers were uniformly returned swiftly and accurately. While larger providers not regulated by the FCA returned requests for data in a similarly speedy and efficient manner, this was not always the case for smaller ones, although some were excellent. Several smaller master trust providers on the list failed to respond to repeated requests for the data – three simple pieces of information, and some are still yet to do so, despite repeated contacts over more than 10 weeks. It is hard to see how this lack of transparency accords with trustee obligations or a place on the Master Trust Assurance Framework approved provider list.
Now: Pensions defends its performance
Now: Pensions director of investment and product development Rob Booth says: “The Now: Pensions Diversified Growth Fund launched on 18th December 2012. Between then and 6th September 2017, the fund has delivered member returns of 46.8 per cent. That translates into an annualised return of approximately 8.5 per cent throughout almost five years. In 2017 alone, the fund has delivered a return of 9.8 per cent.
“Pension fund performance has to be looked at over the long term and we are confident that the Now: Pensions Diversified Growth Fund will provide our members with strong risk adjusted returns.
“We adopt a balanced risk approach to investing, which involves a much higher degree of diversification than mundane equity dominated investment styles. Of course, during periods of very strong equity market returns such as we have witnessed over the recent past, the Now: DGF will be outperformed by funds with a high equity content. However, the investments we make must display risk /reward relationships that are in the best interests of the portfolio.
“We do not believe that exposure to currency exchange rates falls within that category, and we therefore hedge our currency exposure on overseas investments back to sterling. By doing so, we can ensure that members’ funds will not be impacted by exchange rates, be they strengthening or weakening.
“Returns for many funds were significantly enhanced during the second half of 2016, simply because of the collapse of sterling following the unexpected Brexit vote. That short-term boost may or may not be corrected, but it is not a risk for our members.”