Punter Southall Aspire reveals DC platform providers’ default funds vary significantly on benchmarks, allocation and risk at both growth & consolidation phases
Many companies assume their default DC pension funds are standardised across the industry, but new reports from Punter Southall Aspire, a major investment and savings business, reveal this is far from the case and urge Employers to monitor their pension funds’ performance more closely.
The two reports, ‘Who’s performing well?’ examined nine major DC pension provider’s default pension funds both in their growth phase and at their consolidation phase (as of 31st March 2018). Huge variations in outcomes were revealed.
During the growth and consolidation phases, funds vary in design and construction, investment risk and volatility, asset allocation strategy, return benchmarks, management and critically, performance. Furthermore, providers’ defaults have adopted different ‘glidepaths’ towards retirement which impacts overall performance and results.
Steve Butler, Chief Executive, Punter Southall Aspire, said: “Over the last nine months the global asset markets have changed, with high positive returns much harder to come by and volatility rising. Members need a solid saving and investing path, and this means selecting strategies with good fund diversification and the “wise” use of active management to enhance returns and achieve a financially secure retirement.
“This is our third report into DC default pension funds and again, we’re seeing wide variations, which may surprise some employers. Employers have a duty to actively manage their funds and regularly check their performance as they could be unwittingly putting their employees’ pension pots in jeopardy.”
What is happening in the growth phase?
Most of the default funds sit within an Assets under Management range of approximately £600m and £13bn, depending mainly on their launch date.
The report found the allocation to equities, bonds and other asset classes varies dramatically between the default funds, depending mainly on the targeted risk levels and the range of investment tools used.
In the broadest terms, those providers (Royal London, Standard Life, Fidelity, Aviva, Legal & General) who have their own asset management arm have developed the more diversified and sophisticated default offerings.
In general, the growth phase of the average default option is designed with significant exposure to equities to maximise growth. The average allocation to equities amongst the defaults was around 66%, with Scottish Widows’ default having the highest exposure at 84%, while Legal & General and Standard Life’s have both the lowest exposure at 44% approximately of their total asset allocation.
Default options also hold a significant portion of Fixed Income, allocating 27% on average to this asset class. Legal & General and Fidelity have the highest allocation with 47% and 37% respectively, while Royal London has no exposure at all.
Over the last three years, the Zurich fund was the best performer (7.3%), although on a relatively higher level of risk (9.5%) compared to the other defaults, which is no surprise given the levels of equity within the fund (77% equities). In the same period, Standard Life produced the worst return (3.5%), but it does exhibit a consistently lower level of risk (5.3%) than all the default funds.
These figures highlight the wide performance spread amongst the top and bottom performers, indicating the significance of the asset allocation in the growth phase to maximise members’ fund values.
The timing of when the growth phase period ends, with assets moving gradually to lower risk assets, also differs significantly amongst all the providers. The duration of the growth phase could have a significant impact on members’ fund values.
The longer the period it provides members with more chance of creating higher fund values at retirement, but also less downside protection as they get closer to retirement.
What is happening to funds at the consolidation phase report?
The analysis is broken down into two periods of time, 5 years before retirement and at retirement, and uses the underlying fund allocation of the default strategies during those time periods to assess how well they align with their retirement objectives and to establish if they still provide efficient growth (relative to the level of risk taken) at the different glidepath stages.
Looking at portfolios 5 years before retirement and ‘at retirement’, for some providers (Zurich, Royal London, Fidelity) not all the underlying funds (of their default solution) had a 3-year track record as at Q1 2018.
5 years before retirement: amongst the rest, Legal & General’s fund was the best performer (6.6%), although at a relatively higher level of risk (7.2%) compared to the other defaults. Standard Life produced the worst return (2.7%), relative to the risk taken (5%). In terms of risk-adjusted performance, Legal & General have the highest Information Ratio (0.40).
‘At retirement’: amongst the rest, Legal & General was the best performer (6.6%), although at a relatively higher level of risk (7.2%) compared to the other defaults. Aviva (My Future) produced the worst return (1%), relative to the risk taken (4%). In terms of risk-adjusted performance, Legal & General have the highest information ratio (0.67).
The only similarity across all providers in their equity glidepath is that the allocation to equities tends to decline as members approach retirement. However, the initial allocations, the changes to allocation and the ‘at retirement’ allocation are different for almost every default strategy and depend mainly on the risk levels being targeted and the range of investment tools used.
Conversely, the overall bond allocation tends to increase closer to retirement for most of the default solutions.
For ‘5 years before retirement’ portfolios the average allocation to equities amongst the defaults at this stage of the consolidation phase was around 43%, with Fidelity’s default having the highest exposure at 58%, while Royal London has the lowest exposure at approximately 32% of their total asset allocations.
On the fixed income side, default options allocate 47% on average to this asset class, with Aviva (My Future) and Scottish Widows having the highest allocation with 65% and 60% respectively.
The average percentage of the overall allocation to alternative investments within the default funds is almost 7%, with Royal London (30%) and Standard Life (18%) placing the highest weights.
For the ‘at retirement’ portfolios, the average allocation to equities amongst the defaults at this stage of the consolidation phase was around 25%, with Legal & General’s default having the highest exposure at 45%.
On the fixed income side, default options allocate 52% on average to this asset class, with Aviva (My Future) and Scottish Widows having the highest allocations with 81% and 75% respectively. The average percentage of the overall allocation to alternative investments within the default funds is almost 6%, with Royal London (25%) and Standard Life (11%) placing the highest weights.
Finally, when it comes to fees (both growth and consolidation phase) even if charges vary from scheme to scheme they remain crucial in the final outcome of each default strategy, as they affect members’ fund values and subsequently members’ available income at retirement.
The more diversified and sophisticated the default option, the higher the total cost. Therefore, providers need to ensure consistent performance and efficient protection from market volatility to create value for money and justify the higher fees.
Steve Butler, Chief Executive, Punter Southall Aspire, adds: “Default doesn’t mean standard. With so many variations employers need to examine all aspects of their DC default fund carefully to understand exactly what they are getting and how their funds are performing.
“We urge employers to do more research, ask more questions and get advice from experts before they make investment decisions. They must also review the management and performance of their funds regularly to ensure that at retirement, their employees get the best pension and retirement possible.”
COVID-19 and PCL property – a market on the rise?
By Alpa Bhakta, CEO of Butterfield Mortgages Limited
Over the last five years, demand for prime central London (PCL) property has been fairly inconsistent. Sudden peaks in interest from buyers could be followed by periods of stagnate price growth. Nonetheless, the advantages of PCL property investment, particularly by international investors, has remained well known.
Well-funded development and neighbourhood re-generation schemes, alongside an influx of overseas investment, has resulted in a vibrant market with a diverse range of opportunities for prospective buyers.
Nonetheless, the PCL market has not been immune to the impact of the COVID-19 pandemic. During the first half of the year, the lockdown meant physical valuations and onsite inspections could not take place. People in the UK were also discouraged from moving properties unless they found themselves in extreme circumstances.
However, as we now enter the final weeks of 2020, I believe there’re plenty of reasons to be optimistic about the future prospects of the PCL property market. Buyer demand has resulted in a new wave of activity, and this is resulting in significant house price growth. Indeed, it was recently revealed by Halifax that the average rate of house price growth in November was at a four-year high.
Obviously, there are multiple factors that have helped sustain this strong level of house price growth. Most notably, the Stamp Duty Land Tax (SDLT) holiday has succeeded in coaxing buyers back to the property market––be they seasoned buy-to-let (BTL) investors or first-time buyers––by offering up to £15,000 in tax savings on any given property purchase.
However, it’s worth considering the other factors underway in London’s property market. With the UK in a second national lockdown, many investors will be keen on hedging against future COVID-imbued market uncertainty through acquiring safe-haven assets like British property. As you’ll read below, this is having a positive impact on the PCL market.
Investors are flocking to PCL opportunities
The PCL property market has managed to be one of the most active areas of the UK’s real estate market during the whole of 2020. When discussing why this is so, we must first begin by understanding the behaviours of overseas buyers.
Given that international investors represented over half (55%) of all the PCL property purchases recorded in the second half of 2019, anything to further incentivise or dissuade such foreign actors would hugely impact PCL property transaction figures.
Earlier in the year, alongside the announcement of the aforementioned SDLT holiday, UK Chancellor Rishi Sunak indeed announced that he would be implementing 2% SDLT surcharge for non-UK based buyers of British property from April 2021 onwards.
So, for those seeking properties worth over £5 million in the UK capital, a 2% additional cost may represent a substantial amount of wealth. To avoid this, many overseas buyers who may have been contemplating a PCL property acquisition have rushed to buy such properties before this surcharge is applicable. This trend will undoubtedly continue until 1 April, 2021.
Remote working and PCL
On the topic of the PCL market’s future, many property speculators were concerned earlier this year that London’s property market would potentially collapse entirely as a result of remote working. With homeworking set to remain the norm for the foreseeable future, commentators predicted that professionals would escape the capital en-masse in favour of roomier, cheaper properties farther from their London employer’s offices.
While there have been some signs of shifting demand from urban London neighbourhoods to suburban ones, according to Rightmove statistics, there has been no recordable effect on the UK’s property market as a result.
Conversely, property specialists Savills have actually discovered that over half of all transactions including properties worth more than £5 million in the UK this year were all located in just five central London postcodes.
A busy few months
Given the performance of the PCL property sector in 2020, I only foresee this market growing stronger and stronger in the years ahead. Recent developments in the production of COVID-19 vaccine have many hoping that we may return to normality by Spring 2021, which would represent fantastic news for those involved in bricks and mortar, should it transpire.
In the coming months, I anticipate a surge in activity across the PCL market as buyers look to take advantage of the tax breaks on offer. As such, it will be important that these buyers have access to the financing needed to complete these transactions quickly. If not, there is a risk any purchase they attempt might be concluded in April 2021 when the current tax breaks in place are removed.
Overall, I cannot help but be impressed by the performance of the property market more generally during the pandemic. Having experienced slow growth in the years following the EU referendum in June 2016, it is clear that buyers are eager to take advantage of the opportunities on offer. This is particularly true when it comes to PCL property.
An outlook on equities and bonds
By Rupert Thompson, Chief Investment Officer at Kingswood
The equity market rally paused last week with global equities little changed in local currency terms. Even so, this still leaves markets up a hefty 10% so far this month with UK equities gaining as much as 14%.
The November rally started with the US election results but gathered momentum with the recent very encouraging vaccine news. This continued today with the AstraZeneca/Oxford vaccine proving to be up to 90% effective in preventing Covid infections. This is slightly below the 95% efficacy of the Pfizer and Moderna vaccines already reported but this one has the advantage of not needing to be stored at ultra-cold temperatures. One or more of these vaccines now looks very likely to start being rolled out within a few weeks.
Of course, these vaccines will do little to halt the current surge in infections. Cases may now be starting to moderate in the UK and some countries in Europe but the trend remains sharply upwards in the US. The damage lockdowns are doing to the recovery was highlighted today with the news that business confidence in the UK and Europe fell back into recessionary territory in November.
Markets, however, are likely to continue to look through this weakness to the prospect of a strong global recovery next year. While equities may have little additional upside near term, they should see further significant gains next year. Their current high valuations should be supported by the very low level of interest rates, leaving a rebound in earnings to drive markets higher.
Prospective returns over the coming year look markedly higher for equities than for bonds, where return prospects are very limited. As for the downside risks for equities, they appear much reduced with the recent vaccine news and central banks making it clear they are still intent on doing all they can to support growth.
Both factors mean we have taken the decision to increase our equity exposure. While our portfolios already have significant allocations to equities and have benefited from the rally in recent months, we are now moving our allocations into line with the levels we would expect to hold over the long term.
Our new equity allocations will be focused on the ‘value’ areas of the market. The last few weeks have seen a significant rotation out of expensive high ‘growth’ sectors such as technology into cheaper and more cyclical areas such as financials, materials and industrials. Similarly, countries and regions, such as the UK which look particularly cheap, have fared well just recently.
We think this rotation has further to run and will be adding to our UK exposure. This does not mean we have suddenly become converts to Boris’s rose-tinted post-Brexit view of the UK’s economic prospects. Instead, this more favourable backdrop for cheap markets is likely to favour the UK.
We will also be adding to US equities. Again, this does not represent a change in our longstanding caution on the US market overall due to its high valuation. Rather, we will be investing in the cheaper areas of the US which have significant catch-up potential.
We are also making a change to our Asia ex Japan equity holdings. We will be focusing some of this exposure on China which we believe deserves a specific allocation due to the strong performance of late of that economy and the sheer size of the Chinese equity market.
On the fixed income side, we will be reducing our allocation to short maturity high quality UK corporate bonds, where return prospects look particularly limited. We are also taking the opportunity to add an allocation to inflation-linked bonds in our lower risk, fixed income heavy, portfolios. These have little protection against a rise in inflation unlike our higher risk portfolios, which are protected through their equity holdings.
Optimising tax reclaim through tech: What wealth managers need to know in trying times
By Christophe Lapaire, Head Advanced Tax Services, Swiss Stock Exchange
This has been a year of trials: first, a global pandemic and, now, many countries facing the very real possibility of a recession. For investors, private banks, and wealth managers, these tumultuous times have manifested largely in asset price volatility, ultra-low interest rates and uncertainty about when things may level out, as well as questions about what can be done to safeguard portfolio performance.
The answer here lies within identifying and creating efficiencies to maximise performance and minimise cost, and while there is a slew of options as to how to do this, they are often siloed or have a single USP. Tax optimisation, on the other hand, provides benefits to all, not just in increasing returns for investors, but also in creating economies of scale across stakeholders, creating millions – if not billions – in savings for banks.
Evolving tax reclaim
The tax reclaim process used to be a tedious one banks had to manage themselves, and required detailed, industry and country-specific knowledge to stay on top of constantly shifting requirements and regulations. And when we consider that many countries – such as the UK – allow for capital gains exemptions, tax optimisation may not seem like an integral part of the process. However, this isn’t the case for all countries, and can lead to severe after-tax implications on global portfolios.
Furthermore, even if you’re able to avoid double taxation, getting the money back is not always as simple as it sounds. This, combined with the fact that countries often have contradictory taxation rules or requirements, makes navigating the tax reclaim space a challenge even for those with the right expertise and experience.
Ultimately, providing tax optimisation to investors ends up being a heavy lift for private banks and wealth managers, who often don’t have the right solutions, are relying on outdated technology and manual processes. While this is generally fine for business, it is no longer fit for the purpose when it comes to tax optimisation. To date, knowledge and expertise have been the key to protecting and maintaining profitable investments and avoiding tax leakage. However, through tax optimisation services starting to emerge, portfolio managers can now manage and reinvest easily.
Today, technology has evolved the process so that banks are able to access and submit tax reclaim – and the relevant documentation – online, leaving the tech provider to coordinate next steps with custodians and tax authorities behind the scenes. In essence, taking the legwork out of the process while assuring consistency and completeness in execution.
Simplifying tax through tech
While tax optimisation may seem like an easy choice in theory, it is not always the go-to for every private bank or wealth manager. Without the right supports and setup, including innovative technologies and automation, tax reporting must be done manually, leading to labour intensive processes and huge time wastage. Changing these processes can be overwhelming for those used to a certain way of operating.
By making tax reclaim digital, banks will be more able to optimise returns and gain efficiencies while reducing redundancies and unnecessary complexities. Cloud based solutions or platforms can offer a safe and secure solution for banks, wealth managers, and investors to access and submit any information required, processing the data automatically for conformity and completeness.
It is critical that providers who intend to offer tax services are able to do so efficiently with the right software and data processing capabilities. Not only does this drive continuity in service and efficiencies in process, but it is the only sustainable way to handle such a complex landscape sustainably without wasting time or money.
End-to-end, technologically driven tax services offer a huge number of advantages to private banks and wealth managers, the most important of which is the ability to provide continuity through tumultuous times. As we move through the end of 2020 into 2021 this will only be increasingly important as banks, managers and investors look to provide new services to clients and strengthen existing relationships in a difficult market.
As investors seek to find returns amid the global economic downturn, the demand for innovative solutions will only increase. Technology like cloud-based software, AI, and data optimisation can all serve to improve not just the tax reclaim processes, but the overall client experience within capital markets. Private banks and wealth managers are suitably equipped to provide these innovative solutions, but those who do not prepare themselves effectively and keep ahead of trends will run the risk of losing current and new clients to someone who can offer more for less.
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