Defined contribution – Feature
If the UK’s defined contribution (DC) pension market is com- pared to the lifecycle of a person, then it is no longer a baby and has become a toddler. After a strong start in a buoyant market environment, where investment portfolios could simply be swaddled away in passive index strategies, they have now entered a more challenging phase.
This in part is due to more challenging markets, but also the rapid growth of the assets managed by occupational pension schemes thanks to auto-enrolment and growing consolidation in the industry.
As DC schemes grow, new opportunities arise. The watchful parents, in this case policymakers and regulators, are keeping a close eye on this development, as Department for Work and Pensions (DWP) consultations on broadening investment opportunities and value for money illustrate. These trends mean that such schemes will have to reposition their portfolios to be more active, with inevitable bumps along the way.
Strong start
The birth of auto-enrolment a little over a decade ago could not have come at a better time for occupational pension schemes, which were focused on equity-heavy, low-cost, index strategies. Trustees have been well rewarded for the change in strategy that resulted from the rise in membership.
During the past five years alone, the S&P500 jumped almost 50% to more than 4,000 basis points from 2,700 in 2018. The
S&P500’s 10-year rolling average stands at 14.5% and the returns recorded by other major stock indices were equally as juicy over the same period. Such gains are reflected in the performance of the growth-ori- entated master trust default funds. National Pension Trust, the Aon Mastertrust and SEI Master Trust reported annualised returns north of 8% in the past three years, according to Hymans Robertson.
Other master trusts also produced enviable annualised returns over the same period. The People’s Pension’s Global Invest- ments fund had a cumulative performance of close to 6%, while Nest’s 2040 fund stood at 8.6%.
If their members had moved their retirement savings to a swanky hedge fund office in Mayfair, they might not have received similar returns over the past 10 years (a fact that is indicative of the mixed performance of hedge funds through- out that period).
It is worth adding that the picture is mixed, with some master trusts returning less than 4% during the same period, and one earning less than 2%, according to Hymans Robertson.
Bumps along the road But last year started to turn sour when stock markets were more volatile. The S&P500 dropped by more than 10% in 2022, which was reflected in the performance of the previously successful DC default strategies. Nest’s 2040 default fund
Issue 121 | March 2023 | portfolio institutional | 21
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