Punter Southall Aspire publishes 2021 DC Default Fund Survey

Who's performing well?

DC Default Fund Strategy Survey

Punter Southall Aspire has published its 2021 DC Default Strategy Survey which examines how providers in the defined contribution pensions market have managed with the impact of the pandemic on long-term returns, as well as analysing risk management and future growth opportunities.

The ‘Who’s performing well?’ report analysis covers three stages of the DC Defaults’ investment journey from nine leading providers in the DC market over the past three years – the Growth phase, Consolidation phase and Retirement phase - and highlights providers have coped with the impact of COVID-19 with varying degrees.

The report benchmarks the performance of providers and highlights key data about annualised, cumulative and risk return performance and asset allocation to equities, bonds, alternatives, and other asset classes.

Christos Bakas, Associate Director, 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.

“For those approaching retirement, it was hoped that the design of default investment strategies would help reduce the impact of big stock market falls. Our annual survey reveals what 2020 has meant for the pension savings provided to employees and pension scheme members, by reviewing the performance of the major pension providers in the DC market over the medium and longer term.”

Key conclusions from the report:

• Given the diversified nature of the DC Defaults and holdings to manage investors’ exposure to risk, it is no surprise that these strategies outperform the global equity market in periods of falling equities and underperform in periods of rising equity markets. Similarly, these strategies have a less extreme range of returns than equities. It’s important for employers to consider how much risk is appropriate for their membership profile and how much return the fund is delivering for the level of risk taken.

• Even if charges vary from scheme to scheme, they remain crucial in the outcome of each DC default as they have a measurable and material effect on members’ fund values and subsequently available income in retirement. 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.

• Punter Southall Aspire continues to believe that a well-diversified portfolio, including an exposure to higher risk investments would, in the normal course of events, be expected to provide good long-term returns.

• Following the pandemic’s aftermath, providers will need to be “dynamic” in their investment decisions and continue working on the risk management of their DC Defaults to ensure they provide efficient protection especially for those members close to drawing their benefits.

• Punter Southall Aspire believes to generate the long-term investment returns appropriate for pension investments, sustainability is required.

• Addressing climate change is a top priority for providers in general in the upcoming decades, as they face a potential portfolio value loss of trillions triggered by the effects of rising temperatures. By moving towards low-carbon investments in DC Defaults, they anticipate improved, more sustainable long-term pension investment growth.

Bakas adds, “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.”

To read the report in full click here.

The default funds examined are run by Aegon, Aviva, Fidelity, Legal & General, NEST, Royal London, Scottish Widows, The People’s Pension and Standard Life. This is the fourth annual report from Punter Southall Aspire tracking the default funds market.