The difference between the best and worst performing master trust default funds equates to a difference in pension pot value of 10 per cent over three years, according to research.
In its eight page report Master trust default fund performance review, consultancy firm Hymans Robertson disclosed the performance of 16 workplace pension schemes in three different stages of the savings journey – the growth, consolidation and pre-retirement phases.
In the growth stage, which occurs 30 to 5 years from retirement, it found a difference of more than 6 per cent in returns per year over three years between Mercer (8.10 per cent), the best performer, and Now: Pensions (2.1 per cent), the worst.
According to Hymans Robertson, this can mean a difference of 10 per cent in the value of a member’s defined contribution (DC) pot over the course of three years - based on an individual with a salary of £24,000 a year, receiving an 8 per cent pension contribution and with a starting pot value of £1,000.
The analysis, which used data up to 31 March 2018, showed master trusts overall saw relatively low returns in the past year, with the median performer delivering just 1.5 per cent.
This can be attributed to a poor return from growth assets in Q1 2018, the consultancy said.
Jesal Mistry, head of DC scheme design and provider evaluation, and author of the report, said schemes had not been taking sufficient risk at this saving stage.
He said: "In this growth phase, where members are a long way from retirement, short term risk mitigation through diversification of asset class or active asset allocation is of questionable value."
He said regular contributions from members already provided diversification as a result of pound cost averaging.
"Funds are relatively small, any volatility of performance is typically short term in nature and has a negligible effect on long term outcomes," he added.
In the consolidation phase - five years from retirement – a simple, strategic asset allocation was seen to have performed better than complex, expensive dynamic asset allocation.
Over one year performance has been low, with the median performer delivering a return of 1.2 per cent, while the three-year performance was around the 6 per cent mark.
However, there were a number of master trusts which outperformed others on a relative basis, such as Mercer and the National Pension Trust.
Mr Mistry said in this phase a focus on short term risk and protecting against negative returns became more important.
He said: "With only five years to go, a member’s final outcome could be significantly impacted by market downturns.
"The remaining contributions left to be paid could be insufficient for a member’s fund to recover any market-driven loss."
In the last stage – one year before retirement – providers were seen to be taking too much risk, leaving them at risk of market downturn.
Over one year the variation of returns ranged from 0.1 per cent to almost 4 per cent, with one master trust – Friends Life – registering a negative return.
