LCP's third annual Master Trust report highlights that over 2023 providers with a high equity allocation during the growth phase gained the best returns, whilst highly diversified strategies provided a smoother run for members nearing retirement. 

The report looks at the investment landscape in 2023 and how it affected master trust investment strategies. It highlights the significant difference and variation in performance,  with the best-performing trust delivering an impressive 17.3% return, while the worst-performing trust yielded only 7.9%.

Equity returns boost member outcomes 

In 2023, investment strategies with a high allocation towards overseas equities performed better than those that invested in bonds and other alternatives. In particular, master trusts holding government bonds for diversification experienced high volatility in 2023. 

This was a reversal of the situation in 2022 when volatility in equity and bond markets benefited strategies with a high level of diversification.  

The report shows that over the longer term, diversification hasn’t paid off for members in the growth phase, and as a result, most master trusts have now adjusted their asset allocation to capture more return from equities.

Other key findings from the report:

Diversification helped some master trusts in 2022 but dragged on performance in 2023 and, in some cases, increased risk. 

Many master trusts have reduced allocations to long government bonds in the de-risking phase, which has reduced the risk for members approaching retirement. Performance for most schemes was between 8% and 12% for members 5 years from retirement, but volatility varied between 5% and 10%. 

Returns near retirement and more consistent between providers, indicating providers are removing unrewarded risk in the run up to retirement.  

Nigel Dunn, Partner at LCP, said: “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.”