Conversely, investment consultants and actuaries Hymans Robertson reported these defined contribution (DC) schemes are taking an overly cautious investment approach in the early years, which is likely to lead to poorer member outcomes.
Anthony Ellis, head of defined contribution investment proposition at Hymans Robertson, said: “Buoyed by the introduction of auto-enrolment in 2012, master trusts now account for 35 per cent of the workplace pensions market.
“The assets of more than seven million UK DC savers are now invested in these vehicles."
The consultancy firm compared the performance from master trusts accounting for 94 per cent of the market until the end of June 2017, examining three main investment stages: Growth phase (30 years to retirement), consolidation phase (5 years to retirement), and pre-retirement phase (one year to retirement).
In the first stage, while the majority of schemes “are taking enough risk, the focus on short term volatility reduction by some is costing members through lower long term net returns,” Mr Ellis argued.
He said: “In these cases this is likely to result in poorer member outcomes.”
The strategies that have embraced higher risk asset classes (Zurich, TPT Retirement Solutions and BlueSky) have outperformed the strategies that have a heavy focus on risk mitigation (Now: Pensions, Fidelity and Standard Life).
In the consolidation phase, “where the focus should be on delivering solid returns but with a significant element of capital preservation and risk reduction, the picture is mixed,” Mr Ellis said.
The data shows that Legal & General, TPT Retirement Solutions and Nest have all delivered strong performance with commendably low levels of risk.
Aviva and Standard Life have delivered lower risk, but at the cost of lower - but still relatively strong - return.
Zurich has delivered strong returns but with high levels of volatility, the report stated.
Overall, in the pre-retirement stage, the market delivered very strong returns for members close to retirement.
Mr Ellis said: “On balance, our view is that the majority of providers have carried too much risk in this phase.
“At this stage, investment risk should dialled down significantly and the investment strategy should be consistent with the member’s decision at retirement.”
Hymans Robertson’s research also revealed that this market is expected to grow to £300bn by 2026.
From April 2018 the minimum total auto-enrolment contribution - from both employer and employee together - will increase to 5 per cent. One year later, it will increase to 8 per cent.
A total of £17bn a year will be going into workplace pensions by 2019 to 2020 as a result of auto-enrolment, according to the Department for Work & Pensions (DWP).
Mr Ellis argued that when assessing a master trust performance, returns shouldn’t be the sole focus.
He said: “It’s also vital to look at the amount of risk being taken at different stages of the savings life cycle 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.”
According to Nathan Long, senior pensions analyst at Hargreaves Lansdown, “it is somewhat perverse that auto-enrolment brought with it a general lowering of risk and increased attention to volatility in default funds”, but also “an increase in the risk on the run in to retirement”.
He said: “The only way to properly help clients be appropriately invested as they approach the time when they need to access their pension, is to engage them and educate them with their retirement savings.”
Mr Long argued that everyone is different and “will access their pension at different times and for different reasons”.
“A mid-life MOT at age 50 looks the perfect way to kick off planning for what is the most important decade for retirement,” he concluded.
maria.espadinha@ft.com
