Half of DC schemes opt for multi-asset defaults
Data analysis: Almost half (49 per cent) of defined contribution schemes now employ a multi-asset or diversified growth fund in the default phase, reflecting a desire to manage investment volatility for scheme members.
The National Association of Pension Funds’ 2013 annual survey found 30 per cent of respondents offered a multi-asset strategy, and 19 per cent a DGF. Taken together, this is a five percentage point rise on 2012.
Auto-enrolment has brought more focus on quality for the swathe of uninitiated savers coming into the market. This has been compounded by the Pensions Regulator’s DC code of practice, issued last month.
Some pension managers and trustees have chosen multi-asset and DGF strategies in an attempt to smooth out the investment experience of the DC member, over concerns that aggressive swings in markets could poison attitudes to retirement saving.
But others, such as London and Quadrant Housing Trust, have decided the funds do not provide any added value for the extra cost when compared with a more traditional passive strategy
Traditional passive tracker funds – seen as a cheaper but more mechanistic investment strategy – reduced as a proportion of default strategies to 38 per cent from 42 per cent last year.
Joanna Sharples, DC investment principal at Aon Hewitt, said the consultancy was seeing changing attitudes towards how to construct default investment structures and more emphasis on asset diversification to improve member outcomes.
“In our experience, many clients are introducing multi-asset funds as a means of better managing risk as members approach retirement, while still maintaining growth potential,” she said.
“Multi-asset funds tend to be ready-made pooled funds and may have higher charges, compared with passive-only strategies, due to the nature of the underlying asset classes combined with the greater use of active management.”
Catherine Doyle, head of DC at BNY Mellon Asset Management, said the rise of multi-asset demonstrated a growing interest, from those putting default strategies together, in risk-adjusted returns that are more resilient to market falls.
“This reflects the recognition that DC schemes require a smoother journey towards retirement,” she added.
Capping expectations
The government is currently consulting on capping the fees that can be charged to members for auto-enrolment schemes, including a proposal for a 0.75 per cent cap, and critics have said it could reduce the availability of these kind of strategies.
Sharples said: "Some trustees are starting to build their own multi-asset portfolios using a mix of passive and active management in order to manage these costs."
Many current and established schemes fall well within the proposed cap, but there are concerns for the value that smaller employers will be able to achieve when it comes to staging.
The consultation also asks for views on what should be included in the calculation of the limit, which will be crucial to the impact on these multi-asset strategies.
"Depending on what charges the cap included, this would have the effect of limiting the allocation to such [DGF] strategies, particularly if the underlying assets were actively managed," said Doyle.