A new report from Punter Southall has revealed the best-performing defined contribution default providers during Covid-19, with Nest and L&G leading in the consolidation phase, Smart Pension topping cumulative performance in the growth phase, and L&G Multi Asset doing best in the retirement phase.
In a year defined by the market shock resulting from the Covid-19 pandemic, the Punter Southall report showed how the differing designs of default funds coped with market turbulence, revealing that DC default funds in general rebounded “relatively fast”.
Equity-driven funds were hit hardest but then benefited the most from the rebound, especially those with the lowest exposure to UK assets.
Default funds with more diversification and lower levels of risk, meanwhile, saw “average performance”, better protecting members from the downturn but then largely failing to make the most of the recovery in overseas equity markets.
Moving forward, providers will need to continue working on strategies to reduce risk and ensure they can be nimble enough to make the right decisions at the right time to protect those nearing their chosen retirement age
Christos Bakas, Punter Southall Aspire
Christos Bakas, associate director for investment at Punter Southall Aspire, said: “The most common phrases we heard about investment markets in 2020 include words such as ‘torrid’, ‘unprecedented’ and ‘shock’.
“After nearly 12 years of positive stock market returns, the 20 per cent plus falls in March 2020 came as a shock for many, especially those nearing retirement age. Suddenly, savers were nervously checking their pension values and seeing negative figures which they hadn’t experienced since 2008.”
In the report, he wrote that the diversified nature of the DC default funds meant it was “no surprise that these strategies outperform the global equity market in periods of falling equities and underperform in periods of rising equity markets”.
Charges vary from scheme to scheme, and are crucial in the final outcome of each DC default “as they have a measurable and material affect on members’ fund values and subsequently available income in retirement”, the report stated.
“The more diversified and sophisticated the default option, the higher the total cost. Therefore, providers need to ensure consistent performance and efficient protection from market volatility to create value for members and justify higher fees.”
Bakas added: “Moving forward, providers will need to continue working on strategies to reduce risk and ensure they can be nimble enough to make the right decisions at the right time to protect those nearing their chosen retirement age.
“They will have to decide whether catering to the flexible needs of pensions freedoms is worth the added risk to which members are exposed. Both providers and employers will also have to ensure members are much better educated on the need for continued equity exposure once they have started drawing benefits, if they wish to use income drawdown.”
Growth phase
The Punter Southall report noted that there is no “single, specific, consistently applied measure to assess the performance of the default options in the DC market”, with providers using a variety of different comparators, including peer group sectors, composite benchmarks, cash or inflation-linked indices.
However, it found that providers delivered returns of between 4.5 per cent and 10.3 per cent a year on a three-year annualised basis.
Aviva My Future Growth scored highest, with the Fidelity Growth Portfolio second on 9.5 per cent, while Royal London Governed Portfolio IV and Standard Life Active Plus III scored 5.9 per cent and 4.5 per cent respectively.
On a five-year annualised basis, the Fidelity Growth Portfolio, Aviva My Future Growth and B&CE The People’s Pension (up to 85 per cent shares) scored highest, with 10.9 per cent, 10.3 per cent and 10.1 per cent respectively.
Royal London Governed Portfolio IV and Standard Life Active Plus III brought up the rear, with 7.3 per cent and 5.3 per cent respectively.
“There’s a great deal of variation across providers’ default strategies, particularly in terms of the level of risk they build into the growth phase of their strategy, which affects total performance over the long term as higher risk strategies tend to deliver higher returns,” the report stated.
“However, in short periods like the falling market environment of March 2020, the most conservative strategies in terms of risk had less negative impact on their returns.”
Where asset allocation is concerned, the report noted that “those providers that have their own asset management arm have developed more diversified and sophisticated default offerings, which also take a more dynamic approach to asset allocation (tactical asset allocation) to seek to benefit further from market inefficiencies”.
Consolidation phase
In the consolidation phase, providers delivered returns of between 3.7 per cent and 7.4 per cent a year on a three-year annualised basis, with the Nest 2026 Retirement Fund scoring the highest, and L&G Multi Asset coming in second at 7.1 per cent, while the Royal London Balanced Lifestyle Strategy came in at 3.7 per cent and Fidelity Futurewise at 3.5 per cent, the report stated.
Over a five-year period, these figures were 8.7 per cent and 8.4 per cent for Nest and L&G Multi Asset respectively, and 4.5 per cent each for Royal London Balanced Lifestyle and Fidelity Futurewise.
The report said this indicates “the significance of the asset allocation to maximise members’ fund values”.
“There’s a great deal of variation across providers’ funds, particularly in terms of the level of risk they build into the consolidation phase of their strategy which affects total performance,” it continued.
“It is important for DC defaults to provide efficient risk management, as the consolidation phase is a relatively short period, thus any negative market events may not allow members’ fund values to recover fully.”
Retirement phase
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In the retirement phase, providers delivered returns of between 2.7 per cent and 7.1 per cent a year on the same three-year annualised basis.
L&G Multi Asset scored highest, with with the People’s Pension in second at 5.4 per cent, while Fidelity Futurewise and Standard Life Universal Strategic Lifestyle Profile were the two lowest, scoring 2.8 per cent and 2.7 per cent respectively.
Risk management is important here because “the retirement phase heralds the commencement of the benefit withdrawal stage of membership, with asset allocations designed to match broadly benefits to be taken. Again, in the event of a severe market downturn, members’ fund values may not recover fully”, the report stated.
