Jessica O'ConnorYounger defined contribution (DC) pension scheme members have benefited from the technology sector’s continual dominance in global markets over the past year, according to analysis from Hymans Robertson.
The DC Provider Report published today, found that younger DC scheme members who are around 30 years from retirement have benefited from their higher exposure to equity markets, which have been dominated by US technology stocks associated with artificial intelligence (AI).
The report assessed the member outcomes of default investment strategies of both master trusts and group personal pensions over the past five years.
It examined three sample members, at three different stages of the retirement savings journey, and looked at how their incomes have changed since 2019.
The analysis firstly highlighted someone who is 30 years from retirement – who experienced positive, but varying, levels of performance. It showed that the more assets this member has allocated to equity, in general, the better they will have fared.
Secondly, the report examined someone who is 10 years from retirement. It showed two significant things happening for them.
Their investments recovered from the period of volatility in the bond market during 2022. At this stage of saving, most members have begun to de-risk their investment strategy.
Finally, the report examined someone in the pre-retirement phase – around five years to retirement. It pointed out that at this phase, reducing risk is the norm, to provide certainty up to and throughout retirement.
As DC pot sizes are expected to become larger over time, Hymans Robertson noted that there will be a growing demand for more pre-retirement and post-retirement strategies.
Shabna Islam (pictured), head of DC provider relations at Hymans Robertson, said: “Returns have been strong within the equity market over the last 12 months and it’s particularly pleasing to see that younger members have gained from their higher allocations to equity, as technology and AI-related stocks have dominated the markets. The sector, as a whole, has consistently outperformed over the last few years.
“We expect further developments in provider defaults with the introduction of private market assets in strategies. If this trend continues, we believe providers will begin introducing additional ‘premium’ defaults at an increased cost point – incorporating a higher allocation to private assets by as much as 10-15%.”
Islam added: “Over the past few months, we have witnessed the attention given to the DC market from the Government, with the recent consultation on ‘Unlocking the UK pensions market for growth.’
“Consolidating smaller pension funds into mega funds, with £25 to £50bn of assets under management, will have a large impact on DC pension providers and their default investment strategies.
“Consolidation will have positive implications, such as the opportunity for more private market investment, ultimately leading to better outcomes for scheme members. However, small schemes should still be able to innovate and drive positive change.”
