On the go: There is at least a 600 basis point difference in returns between the top and bottom-performing master trust providers due to a wide variety of approaches to default investment strategies, according to research by LCP.
LCP’s report showed that the best-performing master trusts generated a return of around double that of the lowest-performing master trusts for around 3 per cent more risk.
There is a wide difference between approaches, with master trusts such as Aon, LifeSight and Aegon that have allocated around 100 per cent to equities in the early years before retirement benefiting the most due to strong performance in the equity markets over the past five years.
Meanwhile, LCP found that other providers including Aviva and L&G have had lower returns over that period due to their diversified approaches. These master trusts employ relatively modest allocations to risk assets and derisk over a shorter timeframe, which is leading to a striking disparity in outcomes.
Just two-thirds of master trusts will deliver “moderate” outcomes in line with or above the Pensions and Lifetime Savings Association’s retirement living standards, which help to measure possible outcomes for retirees, the report explained.
The PLSA standards state that a moderate income in retirement is £20,800. By comparison, Aon is expected to generate a median outcome of £24,700, and LifeSight £23,700.
These two master trusts, which derisk to an at-retirement allocation that maintains a relatively high level of growth assets, are on track to deliver the best outcomes for members on average.
LCP’s modelling showed that these providers have a similar proportion of members expected to achieve a “moderate” outcome under the PLSA’s retirement living standards.
However, the research found that Aon’s master trust has a higher probability that members will achieve a comfortable outcome, which is due to the provider’s shorter derisking phase of 15 years compared with 25 years for LifeSight.
LifeSight and Aon also have the widest spread of expected member outcomes at retirement. This means their strategies might not be suited to all memberships, especially where members require more certainty on their expected benefits.
LCP also highlighted the expected impact delivered by climate change and the transition to a lower-carbon world on the returns of savers’ pensions.
The consultancy, partnering with Ortec Finance to assess the climate impact in different scenarios, found that four in nine master trust strategies could see at least a 20 per cent fall in member-expected outcomes if there is a failed transition and global temperatures go beyond 4C.
Nigel Dunn, author of the report and partner at LCP, said that master trust selection is sometimes primarily based on tiny differences in charges.
However, he added: “Our research shows that differences between master trusts in their investment strategy and resultant investment outcomes can be literally hundreds of times more important in determining the size of members’ pension pots.”
In light of these findings, Dunn said those selecting a master trust should pay attention to investment returns and not just fixate on small charge differences.
