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Consultant Warns U.K. Retirement Plans are Mishandling Risk
A Hymans Robertson study of the U.K.’s Master Trust defined contribution market concludes that risk allocations are not what they should be.
Hundreds of U.K. workplace pensions are getting their risk allocations wrong, leaving younger scheme members with lower returns and older members too heavily exposed to risk.
That’s the conclusion of a report released on Monday by investment consulting firm Hymans Robertson, which assessed the Master Trust defined contribution market. Master Trusts, which account for 35 percent of U.K. workplace pensions, are multi-employer schemes in which company retirement funds are outsourced to a team of skilled trustees and assets are aggregated with other company pensions. The consultant projected the size of the Master Trust market would hit £300 billion ($394 billion) in assets by the year 2026.
For the study, Hymans Robertson assessed 15 Master Trusts over three phases: growth, or managing assets for members who are 30 years from retirement; consolidation, for members who are five years from retirement; and pre-retirement, for members who are one year from retirement.
Overall, the survey found that some providers are “far too focused on short-term risk mitigation in the growth phase” and suggested that over the longer term this would be “highly likely to deliver poorer member outcomes.” The report praised the trusts offered by Zurich, the Pensions Trust, and BlueSky for embracing higher risk asset classes but flagged Now: Pensions, Fidelity, and Standard Life for having strategies with a heavy focus on risk mitigation.
A spokesman for Now: Pensions defended the trust’s strategy, saying the group has “deliberately not exposed its members to the additional volatility of sterling exchange rates.” Sterling’s decline in value has accounted for a “significant” element of recent master trust performance, he explained.
“We believe this is an essential component when comparing relative value, which we believe is the report’s objective,” he said.
Fidelity and Standard Life did not respond to a request for comment on the report’s findings.
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In an interview with Institutional Investor, Anthony Ellis, head of DC investment proposition at Hymans Robertson, said fund allocations for members likely to be with the scheme for 30 years or more should have a lesser focus on short-term volatility management.
“If you are investing in a diversified range of asset classes or paying a diversified growth manager to manage volatility, you are losing out on some long-term returns,” he said. “Your average DGF manager will not achieve what the equity market will achieve.”
Ellis added that it is “perfectly possible” that a non-diversified fund will go through periods of poor performance and negative returns.
“But, over the long term – and in the growth phase you are absolutely looking at the long term – you will ride that through,” he said.
A spokeswoman for BlackRock said the firm’s LifePath target-date funds are designed to take more risk in the growth phase and gradually de-risk in an “optimal” manner.
“Taking the right amount of risk at the right time is the foundation of a well-designed investment default,” she said, explaining that investors in BlackRock’s LifePath Flexible funds will have approximately 40 percent of their portfolio invested in equities at the time of retirement. “Our research shows that this is the optimal allocation given the need for DC pensions to continue to grow post-retirement in light of increasing longevity,” she added.
In the Hymans Robertson assessment of the pre-retirement phase, the consulting firm concluded that the majority of providers were still carrying too much risk for members who are months from retirement. Ellis said that the recent performance of markets has been forgiving, leading to returns in excess of 10 percent in some cases, but added that these returns could easily have been negative 10 percent if persistent higher inflation had led to a “reasonable” rise in interest rates.
A spokesman for the Zurich Master Trust said analyzing the market in this way was “difficult” and stressed that individual customers are able to get advice for their own circumstances.
“Defaults have to cater for a wide range of scenarios, even in the run up to the recorded retirement age,” he added.
Brian Henderson, a partner at Mercer leading the firm’s DC and financial wellness team, said his company is “more than happy” to publish the track record of the Mercer Workplace Savings Master Trust, which he said has enjoyed “good performance.” Henderson said Mercer goes to exceptional efforts to engage with scheme members starting from about seven to eight years before retirement. It is at this time that members should choose their fund’s trajectory based on how they will use their money at retirement, he said. Typically, members can move their pot into an annuity, drawdown their investment gradually, or take a lump sum.
The remaining Master Trusts cited in the report did not respond to a request for comment in time for publication.