Structural design of default strategies key to understanding different retirement outcomes

Differences between providers default strategies are leading to gaps in member retirement outcomes, according to analysis from Hymans Robertson. The DC Provider Insights report, published today, found a wide variation in projected member outcomes across providers, even where approaches look similar at headline level. The choice of provider is crucial for members far from retirement as they could risk missing out on the potential benefits of greater exposure to higher growth markets. The variation in asset allocation, portfolio construction and the range of assets used can result in significantly different results. In a market under regulatory and economic pressure, how providers approach their default strategies is crucial, claims the report.

The report, from the leading pensions and financial services consultancy, assesses the impact of default investment strategies used by master trusts and group personal pensions on member outcomes. It looks at three representative members, 30 years, 10 years and five years from retirement. The report also examines how providers are approaching investment strategies after retirement.

For members around 30 years from retirement, outcomes have been driven by the level and type of equity exposure in default strategies, with higher equity allocations generally delivering stronger returns despite periods of market volatility. By around 10 years from retirement, most strategies have begun to reduce risk through greater diversification. Within five years of retirement, de‑risking is now the norm as providers seek to deliver greater certainty, although significant differences between default strategies remain even at this later stage. The impact of provider decisions continues after retirement, as post-retirement strategies also vary and can shape the sustainability of income withdrawals in drawdown.

Commenting on the findings, Shabna Islam, Head of DC Provider Relations at Hymans Robertson, says:

“Our latest Provider Insights underlines the reality that whilst default investment strategies appear similar on the surface, they can deliver very different outcomes for members. The report shows wide variation in retirement outcomes depending on the provider. It shows us that design decisions matter and they can translate into meaningful gaps in members’ retirement outcomes.

“For members who are still some distance away from retirement, the choice of provider is particularly important. Those saving through provider defaults that have higher exposure to equity markets have generally seen better outcomes projected for them over the long run, despite market volatility. Members in lower risk strategies at this stage could be missing out on the growth potential that is needed to support future retirement adequacy.

“As members move closer to retirement, most providers aim to reduce risk and introduce greater diversification. Differences emerge in asset allocation, portfolio construction and the asset class opportunity set. This is expected to lead to variations in projected member outcomes across providers – it means the choice of provider will have a big impact on member’s outcomes.

“The impact of provider choice does not stop when members retire. Post-retirement strategies also vary, and our modelling shows how these differences can shape sustainable income withdrawals in retirement and lead to pot exhaustion.

“Looking ahead, the focus for providers must shift from simply managing risk to delivering strategies that work through different market conditions and member behaviours. With over £370bn invested across the providers’ default strategies covered in this report, this scale along with stronger governance and more effective use of a wider range of assets all have a part to play to improve member retirement outcomes. The direction of travel is clear. The challenge now is making sure these changes are implemented well, so members benefit from more resilient strategies and a better chance of achieving a sustainable income throughout retirement.”

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