FTSE DC funds ‘missing out on diversification’ – Schroders

DC funds of FTSE companies are missing out on the benefits of diversification because they are overwhelmingly invested in developed equities, according to research from Schroders.

The typical default DC scheme of a FTSE pension scheme had 80 per cent of its overall fund allocation in developed equities at the end of March 2014, an increase from 79 per cent in October 2013.

But FTSE 100 firms are more diversified than their FTSE 250 counterparts, with total current developed equity allocations of 77 per cent and 83 per cent respectively.

Just 48 per cent of default DC schemes of FTSE companies have an allocation to emerging markets, compared to 55 per cent a year ago, a clear indication that schemes are moving out of this asset class.

Fewer schemes are now exposed to fixed income, resulting in a significant fall in the maximum allocation – down to 42 per cent from 54 per cent in October 2013, which reflects recent equity market growth.

The research shows the average default DC scheme for a FTSE 100 firm has increased its UK equity exposure by 4 per cent in the last six months from 28 per cent to 32 per cent.

Schroders head of defined contribution Stephen Bowles says: “Since our first report back in March 2013, we are pleased that a wider pool of employees than ever before now has access to company pension schemes through auto-enrolment. 

“One of the most notable findings in our report is that an average scheme has more than 80 per cent of its overall fund allocation in developed equities, while the typical investment in alternative assets has increased to 8 per cent. In fact of the schemes that invest in alternatives, nearly a quarter now has an allocation of 15 per cent or more. By comparison, a year ago this only applied to only a fifth. But we believe all these pension schemes that are not diversifying their assets are missing the valuable growth and low volatility benefits, which can be achieved through diversification opportunities.

“The recent charge cap on default DC funds announced by the government in March has put pressure on providers to cut fees. Although this is an important move to safeguard value for money and transparency for members, it may mean trustees will be less inclined to pursue and adopt diversified allocation strategies due to the cost implications.

”However, there is indeed a new generation of multi-asset solutions that allow for greater diversification and active allocation methods, at competitive pricing points. We believe that as the DC market becomes the key form of pension savings for employees, now should be the time that schemes look to increase the use and adoption diversification tactics. Diversification is not just important, it is vital.”