Employers and trustees have been urged to ‘do their homework’ before selecting a master trust, after research from LCP revealed a nearly 10 per cent difference between best and worst performing trusts in 2023.

The report found a "significant" difference and variation in performance, with the best-performing trust having an "impressive" 17.3 per cent return whilst the worst-performing trust had a 7.9 per cent return.

In particular, providers with a high equity allocation during the growth phase gained the best returns, whereas those with a more diversified approach have seen mixed performances, but were ultimately better for those nearing retirement.

The report also showed a better performance in 2023 for those investment strategies with a high allocation towards overseas equities, when compared to those that invested in bonds and other alternatives.

This was because higher volatility was experienced in 2023 by master trusts holding government bonds for diversification, marking a reversal of the outcomes in 2022, when volatility in equity and bond markets benefited strategies with high levels of diversification.

As a result, most master trusts have reduced allocations to long government bond in the de-risking phase, aiming to reduce the risk for members approaching retirement.

The report also showed that, over the longer term, diversification has not paid off for members in the growth phase either, with many master trusts also adjusting their asset allocation to capture more return from equites as a result.

Overall, the report found that while diversification helped some master trusts in 2022, in 2023 dragged on performance and in some cases increased risk.

According to the report, performance for most schemes was between 8 per cent and 12 per cent for members five years from retirement, but volatility varied between 5 per cent and 10 per cent.

LCP partner, Nigel Dunn, commented: “The investment landscape is expected to remain volatile, which will pose challenges for master trusts.

“However, our review of 2023 has shown that investment strategies can still be successfully managed and executed even during periods of high inflation and interest rates.

“It’s really important that employers and trustees do their homework and understanding their scheme membership before selecting a master trust as there are areas where there are nuances and differences in approach when it comes to investment strategies.

“This is especially crucial during periods of economic volatility.”

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