DC diversification drive continues as UK equity allocations fall further


Asset class diversification continued to grow in the average default allocations of FTSE 350 Defined Contribution (DC) pension schemes over the 12 months to the end of March 2017, the Schroders 2017 FTSE DC report has found.

Diversification is at its highest level since the Schroders DC survey first began four years ago, as pensions funds have increasingly allocated away from developed equities and towards fixed income and alternative assets.

Over the 12-month period the typical FTSE 350 DC pension’s exposure to developed equities, which comprises of global and UK equities combined, fell from 67% to 62%. When the survey first began in March 2013, total average exposure to developed equities had stood at 79%. In particular, UK equities have experienced substantial allocation falls from 33% to 22% over the past four years.

At the same time average FTSE 350 DC pension exposures to fixed income and alternative assets continued to increase over the 12 months ended March 2017, in line with the four-year trend. Average fixed income exposures grew by around a third over the 12-month period from 16% to 21%. Over the last four years average exposures to alternatives have also increased from 7% to 13%.

Stephen Bowles, Head of UK Institutional Defined Contribution, Schroders, said:

“For the last few years pensions have rarely been far from the Government and regulator’s gaze. The roll-out of auto-enrolment, the introduction of the pension freedoms and a greater regulatory scrutiny of master trusts are just a handful of the changes and issues that have defined the UK landscape.

“But with another General Election just a few weeks away and the UK embarking on what is sure to be a highly complex and delicate set of negotiations regarding its future relationship with the European Union there could well be scope for pensions to slip down the list of priorities. This may not be a bad thing, giving much-needed time for the recent changes to bed in.

“What will remain challenging will be the investment environment as markets continue to operate in a period of heightened political uncertainty. This time a year ago a vote for Brexit and the election of Donald Trump both seemed far-fetched possibilities and proved that investors should avoid complacency, no matter what the bookmakers or polls may be saying!

“Our investment principles continue to support the benefits that diversification and risk management can bring to pension savers. And although equity markets on both sides of the Atlantic have recorded strong gains over the last 12 months, we would urge pension funds to remain focused on the advantages that diversified portfolios do bring and not fall into any rear-view mirror investment traps.”