UK defined contribution (DC) master trusts are taking too much risk for their older members as they near retirement, according to Hymans Robertson.

The consulting group also argued that some were taking too little risk in portfolios for younger members, which could lead to “poorer outcomes”.

Hymans Robertson analysed the performance of default investment portfolios run by the UK’s biggest DC master trusts, including NEST, The People’s Pension, and trusts run by Legal & General and Standard Life.

Positive investment returns generated by such funds were “largely as a consequence of supportive markets and unusually low levels of volatility”, the consultancy argued.

Anthony Ellis, head of DC proposition at Hymans Robertson, said: “In assessing performance, the sole focus mustn’t be on returns. It’s also vital to look at the amount of risk being taken at different stages of the savings lifecycle to ensure it’s appropriate throughout.”

The consultancy found that trusts taking a higher risk approach to the early-stage “growth phase” of investing saw better results than lower risk portfolios.

The master trust market “delivered very strong returns for members close to retirement” on a one- and three-year basis, Ellis said.

However, he argued that “the majority of providers have carried too much risk in this phase”.

“At this stage investment risk should de dialled down significantly and the investment strategy should be consistent with the member’s decision at retirement,” Ellis said.

“Over 53% of DC pension pots accessed at retirement are fully withdrawn, and 90% of these pots are less than £30,000 [€34,000] in size. In this context it raises a question mark over exposing DC investors to market risk and market falls.”

In the “consolidation phase” – defined as five years from retirement – Ellis said the picture for performance and risk was “mixed” across the report’s sample set.

More than a third – 35% - of members of workplace pension schemes were enrolled in some form of master trust, Hymans Robertson said. In total more than 7m participate in such schemes.

“Until now there has been no recognised method of comparing relative value between the different master trust providers,” Robertson said. “Employers, and more importantly their people, should be able to clearly see that value.”

The consultant also claimed that the DC master trust market could control as much as £300bn worth of assets within 10 years.

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