Differences between providers default strategies are leading to significant gaps in member retirement outcomes, according to analysis from Hymans Robertson.
The DC Provider Insights report found a wide variation in projected member outcomes across providers, even where approaches look similar at headline level.
Historic conservative positioning, differences in portfolio construction and regional differences in equity market exposure have driven around 9 percent per annum difference between the best and worst performers at 30 years to retirement.
At five years to retirement, over a three year time frame Fidelity had the best annualised returns at more than 14 per cent, and Royal London was the worst performing at a little over 8 per cent.
Within five years of retirement, de‑risking is now the norm as providers seek to deliver greater certainty, although significant differences between default strategies remain even at this later stage. The impact of provider decisions continues after retirement, as post-retirement strategies also vary and can shape the sustainability of income withdrawals in drawdown.
Shabna Islam, head of DC provider relations at Hymans Robertson, says: “Whilst default investment strategies appear similar on the surface, they can deliver very different outcomes for members. The report shows us that design decisions matter and they can translate into meaningful gaps in members’ retirement outcomes.
“For members who are still some distance away from retirement, the choice of provider is particularly important. Those saving through provider defaults that have higher exposure to equity markets have generally seen better outcomes projected for them over the long run, despite market volatility.”
Islam went on to claim that members in lower risk strategies at this stage could be missing out on the growth potential that is needed to support future retirement adequacy.
The Hymans Robertson modelling looked at how long a member’s pot is likely to last from a retirement age of 67, if it remains invested in the default strategy, with those providers offering post-retirement de-risking strategies.
The modelling assumed a member withdraws at a rate of 6 per cent per year, starting from a £250k pot and accessing their full tax-free cash allowance. All the assessed strategies are projected to support sustainable income at this withdrawal rate for 10 and 20 years post-retirement within 75 per cent of projected scenarios.
The income sustainability picture changes considerably as retirement stretches beyond 20 years, with all but one of the strategies seeing income exhausted in the best estimate case.
