U.K. master trust default funds overcoming COVID-19 impact

Defined contribution multiemployer funds, known in the U.K. as master trusts, are recovering quickly from the coronavirus-induced market downturn in March, according to an analysis published by consultant Hymans Robertson.

In its 2020 "Master Trust Default Fund Performance Review," the consultant showed that retirement outcomes of participants enrolled into 19 U.K. master trusts are on track to regain their projected return rates at the start of 2020. The projections calculated as of June 30 are based on participants enrolled into the default options of U.K. master trusts with a total contribution rate of 10% per year.

The analysis looked at the three stages of the retirement journey — the growth phase, defined as 15 years before retirement; the consolidation phase, which takes place five to 15 years before retirement; and the pre-retirement phase, which is five years before retirement.

For participants in the growth stage, the overall COVID-19 crisis market downturn has been masked by generally positive returns, and providers have returned to their performance of about 3% to 5% per year on a three-year annualized basis. "In the growth phase, members are a long way from retirement and a strategy targeting attractive long-term returns, rather than managing short-term risk, is likely to lead to the best outcomes for members," said Darren Baillie, lead digital consultant for DC pensions at Hymans Robertson, in an emailed comment accompanying the report.

Returns for consolidation phase participants have been similar, with providers back to returning between 3% and 5% per year on a three-year annualized basis as they have generally exceeded the risk range normally associated with this phase, Hymans Robertson said.

"While riskier strategies may offer higher expected returns, they leave members close to retirement vulnerable to market shocks, which could significantly reduce their pension," Mr. Baillie said.

Pre-retirement returns on a three-year annualized basis that were achieved by providers were back to the 1% to 5% per year range. "For most providers, the level of volatility delivered for members has been higher than we would generally expect to see during this phase, but that perhaps isn't surprising in the context of recent market events. There is evidence that members in this phase could be assuming very different and potentially inappropriate levels of risk," Mr. Baillie said.