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Survey Report

Investment – default development and ESG

Chapter three of the FTSE 350 DC Pension Survey 2020

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By Henry Parker | July 13, 2020

Many schemes have already altered their default designs moving towards targeting drawdown or a balanced at retirement outcome. The implementation of ESG has been firmly on the agenda with many looking to incorporate this into the default or seeing it delivered through adding more self-select options.

Our survey shows that default investment strategies have continued to develop for all scheme types. Whilst equities continue to be used to deliver long-term growth for members, for master trusts and trust-based schemes, pure equity allocations have fallen year on year, with greater reliance on diversified growth funds.

Closer to retirement age there is a degree of consistency between all scheme types’ asset allocations, with some exposure to equities and other growth assets maintained, but with bonds and cash dominating reflecting members’ reduced ability to bear investment risk at this point.

There has been a material decrease in the proportion of schemes using a bespoke default strategy year on year (77% bespoke in 2019 vs. 61% in 2020), continuing the trend from previous years.

This may reflect the lower governance demands placed on employers choosing packaged solutions, and the outsourcing of administration and investment design to the chosen provider. In addition, the continued trend towards standardised options is further evidence the market may believe providers have improved their solutions, with a number now, for example, enhancing their offerings through considering sustainable investment issues and improving the diversification of their portfolios away from just equities, bonds, and cash.

With greater media and regulatory focus on these issues it is increasingly likely employees will want to make their views known to the scheme’s sponsors and this may represent a good opportunity to increase engagement.”

Henry Parker
Associate Director, Investment

The proportion of schemes with defaults targeting annuity purchase has fallen materially again, from 21% in 2019 to 15% in 2020, with drawdown-targeting defaults being the predominant replacement. This indicates trustees’ and scheme sponsors’ conviction members are unlikely to purchase annuities at retirement. We may see further exacerbation of this trend in light of the market events of Q1 2020 which have led to falls in annuity rates, which may further erode members’ perceptions of the value of an annuity in retirement.

Sustainable investment and Environmental, Social, and Governance (ESG) issues are an increasing focus for all scheme types. Trust-based schemes are the most likely to have already integrated ESG factors into default investment design, but a significant proportion of both contract-based and master trust schemes are actively considering this over the next 12 months. Around 4 in 5 schemes have already, or are planning in the short term, to integrate ESG and sustainability into the self-select range.

Graph showing survey results around incorporating ESG and stewardship factors into organisations investment strategy.
ESG and stewardship factors in investment strategy

Graph showing survey results around incorporating ESG and stewardship factors into organisations investment strategy.

Schemes which expect to incorporate ESG in the next 12 months are two times more likely to have already, or be planning to, undertake research on their employees’ views on ESG (60% vs 24%).

Almost 9 in 10 (86%) of trust-based schemes have already increased ESG oversight of their providers, with the remaining (14%) planning to do this in the short-term. This may partly have been driven by increased regulatory pressures, although many of the schemes in the sample may adopt a best practice rather than minimum compliance approach to these issues. In contrast, only half of scheme sponsors for contract-based schemes and more than two thirds of employers using master trusts have or plan to increase ESG oversight of their providers.

27% of trust-based schemes are very or extremely likely to change default investment strategy in the next two years, compared to only 14% of contract-based schemes and 14% of master trusts reporting the same. This may simply reflect that many trust-based schemes are approaching their third triennial reviews since the introduction of pensions freedoms in the next two years.

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Henry Parker
Associate Director, Investments

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