The growing mastertrust sector has created a range of investment benchmarks, but pressure to demonstrate value has led consultants to call for more focus on performance yardsticks that reflect scheme memberships.
Increased burden on defined contribution provision following auto-enrolment, and the retirement reforms active on April 6, have lead to increasing scrutiny on value and returns.
Private sector mastertrust Lighthouse Pensions Trust announced last month its adoption of FTSE's latest DC benchmarks, which compare performance at different phases of a saver's working life.
The UK’s leading mastertrusts use a range of benchmarks to assess the performance of funds across different investment strategies. State-sponsored scheme Nest uses inflation-plus benchmarks, while rival Now Pensions opts for both cash-plus and risk-weighted measures.
The People’s Pension is currently undergoing a review of its investment strategy, and declined to comment on the current benchmarks in place within its funds.
Nico Aspinall, head of UK DC investment consulting at Towers Watson, said: “The mastertrust market will settle down… we’re at the foothills now and there is diversity to solutions in the market.”
“What we don’t really want to happen is a peer-group benchmark. We think that glosses over some important differences between products and approaches to investment. There’s a risk that you get a one-size-fits-all solution that doesn’t really fit anyone,” Aspinall added.
The assets of members in DC lifestyle and other default funds will change through the course of their glidepath into retirement.
“If you have one benchmark for a member, over time it will stop being suitable. It’s a question of how you monitor performance over time for a member rather than the underlying building block the member is invested in,” said Aspinall.
How the benchmarks work
The FTSE benchmarks will be a part of the Lighthouse trust’s investment governance process and will evaluate how its default strategy compares with the FTSE UK DC 100 per cent benchmark on a risk-adjusted basis net of fees for discrete cohorts of savers.
Henry Cobbe, managing director and head of research at Elston Consulting, who worked on the benchmarks, said: “Traditionally DC providers have looked at the performance of the fund within the default, not at the strategy as a whole… through the growth phase, derisking and the at-retirement phase and the asset allocation that drives member outcomes.”
Commenting on the new FTSE benchmarks, Dorian Whitehead, senior investment consultant and head of DC at JLT Investment Consulting, said he did not think they were revolutionary but that any benchmark that provided encouragement or provides transparency should be encouraged.
“It’s a combination of global equities and linkers with a certain glidepath, useful if it can target both lifestyle and target dated fund where overall you need a blended return, so for lifestyles where you’re gradually moving out of growth,” he said.
“The issue I have is you have to compare what you’re doing in a complex way to a simple benchmark and lose detail of what you’re trying to achieve."
Cash-plus type benchmarks are typical for diversified growth funds or low-volatility strategies, while for income drawdown funds a Libor-plus benchmark can provide a good comparison for the investment returns.
Whitehead said: “Now we’re talking about hitting the charge cap people are looking at DGFs and growth-type funds – then you want to see what you’re paying and what outperformance you’re getting for that additional payment."
Now Pensions’ DGF has a benchmark of cash-plus 3 per cent¹ over a rolling five-year period. Now has also created a proprietorial 60 per cent equity and 40 per cent bond portfolio, and calculates the risk within that portfolio every year as a risk benchmark. “Internally we also benchmark performance against the 60/40 portfolio," it said in a statement.
Nest’s long-term investment objective targets returns in excess of inflation after all charges. Through the early years of a member’s saving the fund aims to preserve the value of contributions in real terms.
During the growth phase Nest targets a cumulative return of inflation, measured as the consumer price index plus 3 per cent a year over the long term.
¹The original version of this article put this benchmark at cash-plus 5 per cent, after an incorrect statement from Now Pensions. After publication, Now Pensions contacted Pensions Expert to correct its figure to cash-plus 3 per cent. The article has been updated.
