For profess
sional clients on ly. Not suitable for retail clientss
Sc
chrod
ders
FT
TSE
E DC
C Report
Scchroderrs’ 5th FTSE DC report sh
hows ssignific
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divversificcation of
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Issue 5: May 2015
Contents
Page
Schroders’ 5th FTSE DC report shows significant diversification of investment ........................................................................... 3
Trends and key findings – March 2015 .................................................................................................................................................. 4
Asset allocation splits and typical portfolios ....................................................................................................................................... 5
All FTSE portfolio composition: long-term and short-term trends .................................................................................................. 6
FTSE 100 and FTSE 250 comparison .................................................................................................................................................... 7
FTSE 100 and FTSE 250 breakdown: long-term and short-term trends .......................................................................................... 8
Individual scheme observations............................................................................................................................................................. 9
The current DC marketplace at glance ................................................................................................................................................11
Methodology ............................................................................................................................................................................................12
This edition of the Schroders’ FTSE Default DC schemes report is our fifth analysis of the defined contribution (DC)
pension landscape among the top listed companies in the UK. The aim of this six monthly report is to shine a light on
default DC schemes during the accumulation phase in order to examine their different asset allocation strategies.
Since our first report in March 2013, a wider pool of employees than ever before now has access to company pension
schemes through auto-enrolment – now totalling over 5.2 million people1. Of these members, 4.5 million sit within DC
schemes, with 300 such schemes available for auto-enrolment2.
This report analyses the asset class mix of the default funds of FTSE companies’ pension schemes, examining different
strategies, and identifying short-term and long-term trends from over the last two years.
The DC default funds of 30 FTSE 100 and 35 FTSE 250 companies have been researched for this project. Unless
otherwise stated the source of the charts and tables were from research undertaken by Instinctif Partners on behalf of
Schroders.
The next Schroders FTSE Default DC Schemes Report will be published in October 2015.
1
Source: The Pensions Regulator: Automatic Enrolment Declaration of Compliance Report (March 2015).
2
Source: Both figures in this sentence relate to The Pensions Regulator (Annual Statistics, 1 January 2015).
2
Schroders’ 5th FTSE DC report shows significant
diversification of investment
We have been analysing the investment strategies of the UK’s top 350 listed companies’ default DC pension funds every
six months since spring 2013, with this being our fifth edition of the research. While our initial findings reported little
evidence of diversification, this report – our most recent – suggests FTSE firms may have turned a corner.
In particular, FTSE 350 firms are reducing their reliance on developed equities, and starting to spread investment more
evenly across different asset classes. Allocation to developed equities now averages 71%, compared to 79% two years
ago, reflecting a trend to rebalancing asset weighting since 2013.
However, FTSE 100 firms stand slightly further along the diversification path than their 250 counterparts, with average
weighting to developed equities of 69%, compared to 73% among FTSE 250 firms, although across the board significant
improvements have been made.
Over the last twelve months, the move away from developed equities has allowed a significantly heavier weighting towards
fixed income asset classes, with 29% of FTSE firms having some weighting to this asset class, compared to just 3% a year
ago.
Last year proved to be a seminal time for the pensions industry, with the pension freedoms announced in the 2014 Budget
allowing retirees more freedom over their pension funds than ever before. In March, the Chancellor turned his attention to
those pensioners who had already invested in an annuity – proposing a future framework allowing them to sell these on if
desired. With the Conservatives winning a narrow majority in the recent General Election, and David Cameron returning to
Downing St, the pension freedoms will now become entrenched into statute, and further changes will likely follow.
Meanwhile, auto-enrolment has massively boosted pension scheme membership, and over 5.2 million employees now
have access to a company pension. This means investment strategy is relevant to more of the population than ever before,
and is under greater scrutiny as a result.
We believe trustees have a duty to make sure the investments they control are spread across a wide range of assets,
offering greater returns and better protection from risk, while keeping pricing points competitive.
A pattern of diversification has been set in motion, but plenty of room remains for further improvement.
Stephen Bowles, Head of UK Institutional Defined Contribution, Schroders
May 2015
3
Trends and key findings – March 2015
3
–
The typical default DC fund of a FTSE 350 pension scheme has started to significantly diversify its investment
strategy, with weighting to developed assets falling from 79% to 71% since our inaugural analysis in March 2013
–
Over the last six months specifically, FTSE 100 firms have reduced their allocation to UK equities by 4 percentage
points, from 29% to 25%, taking total developed equities allocation down from 72% to 69%
–
Meanwhile, FTSE 250 firms have reduced their allocation to global equities by 4 percentage points, from 44% to 40%,
taking their exposure to developed equities down from 77% to 73%
–
Allocation to fixed income has risen across the board, rising 5 percentage points from 9% to 14% over the last six
months
–
At the same time, allocation to alternatives has risen by 1 percentage point over the last six months to 11%
–
Just under a third of the 65 schemes analysed (29%) have an allocation of at least 20% to the fixed income asset
class, while a year ago this weighting only applied to 3% of schemes
3
Research for the 6 months to 31 March 2015.
4
Asset allocation splits and typical portfolios
Despite moves to diversify asset allocation over the last two years, the typical default DC scheme of a FTSE pension
scheme is still overwhelmingly invested in developed equities. The average default DC fund of a FTSE 350 firm currently
has 71% of its total allocation invested in this asset class – by far the largest exposure of all asset classes – with this
allocation consisting of 29% of assets invested in UK equities and 42% in global equities.
The next most exposed asset class is fixed income, which now accounts for 14% of the typical asset allocation of a default
DC fund, followed by alternatives at 11%.
Emerging markets has the smallest allocation of the specified asset classes, at just 3%, while other or unspecified
investments account for 1% of the total fund allocation.
Such heavy weighting to the primary asset class reveals the continued imbalance present in the average portfolio
composition – presenting an opportunity to redistribute asset allocation in a much more productive manner.
Overall average asset allocation (March 2015)
ALL
UK Equities
29%
Global Equities
42%
Emerging Markets
3%
Fixed Income
14%
Alternatives
11%
Other
1%
March 2015 – Average asset allocation – ALL FTSE
11%
29%
UK Equities
14%
Global Equities
Emerging Markets
3%
Fixed Income
Alternatives
42%
5
Schroders FTSE Default DC Schemes Report
For professional clients only. Not suitable for retail clients
All FTSE portfolio composition: long-term and
short-term trends
Two years on from our first analysis in March 2013, FTSE firms have made clear progress in diversifying the asset
allocations of their default DC pension funds, with a particular focus on increasing allocation to fixed income investments.
Over that period, the average allocation to developed equities has fallen from 79% to 71%, as allocation to UK and global
equities has fallen from 33% to 29% and 46% to 42% respectively. This may in part be due to recent stagnant economic
forecasts for the European and wider economies.
In a particular sign of diversification, the overall average asset allocation to fixed income has risen from 9% to 14% over
the last six months. Inflation expectations have fallen internationally across the board and interest rates have fallen in a
variety of currencies, which has boosted prices and capital returns for fixed income investments.
Over that time period, we have also increased the sample size of our analysis from 40 to 65 FTSE default DC pension
funds.
The alternatives asset class, which includes allocations to investments including commodities and property, has increased
by 1 percentage point over the last six months to 11%, a slightly slower increase than in the six months to October, as the
housing market recovery has slowed-down, but this is now 4 percentage points higher than in March 2013.
Allocation to emerging markets remained steady at 3%, reflecting the volatile political and economic conditions in
developing markets, in particular the conflicts in the Ukraine and the Middle East.
Finally, the average asset allocation to unspecified asset classes has fallen from 3% to 1% over the last six months.
Overall average asset allocation
March 2013 October 2013
March 2014 October 2014
March 2015
UK Equities
33%
34%
35%
31%
29%
Global Equities
46%
45%
45%
44%
42%
Emerging Markets
3%
4%
4%
3%
3%
Fixed Income
9%
8%
7%
9%
14%
Alternatives
7%
7%
8%
10%
11%
Other
2%
1%
1%
3%
1%
*Totals may not equal 100% due to rounding.
Average asset allocation – ALL FTSE
50%
45%
40%
35%
UK Equities
30%
Global Equities
25%
Emerging Markets
20%
Fixed Income
15%
Alternatives
10%
Other
5%
0%
Mar 13
6
Oct 13
Mar 14
Oct 14
Mar 15
Schroders FTSE Default DC Schemes Report
For professional clients only. Not suitable for retail clients
FTSE 100 and FTSE 250 comparison
On a broad level, the average FTSE 100 default DC pension fund is slightly more diverse in asset allocation compared to
the average FTSE 250 default DC fund – and we believe this is consistent with the stronger governance and more
resources accessed by FTSE 100 firms.
On average, FTSE 100 firms allocate 69% of assets to developed equities, compared to 73% by FTSE 250 firms.
FTSE 100 firms typically also have a higher allocation to alternatives than FTSE 250 firms, with an average allocation of
12% compared to 9%.
Emerging markets are given twice the allocation by FTSE 100 firms than by those in the 250, with allocations of 4% and
2% respectively.
However, FTSE 250 firms are taking the lead with investment in fixed income, with an allocation of 15% in this asset class
compared to 13% by FTSE 100 firms.
In our opinion, there remains significant capacity for further diversification of asset allocation.
Overall average asset allocation
March 2013 October 2013
UK Equities
25%
33%
Global Equities
44%
40%
4%
2%
Fixed Income
13%
15%
Alternatives
12%
9%
1%
1%
Emerging Markets
Other
* Totals may not equal 100% due to rounding.
March 2015 – Average asset allocation FTSE 100
1%
12%
25%
UK Equities
Global Equities
Emerging Markets
Fixed Income
Alternatives
Other
13%
4%
44%
March 2015 – Average asset allocation – FTSE 250
9%
33%
15%
2%
40%
7
1%
UK Equities
Global Equities
Emerging Markets
Fixed Income
Alternatives
Other
FTSE
F
100 an
nd FTS
SE 250
0 break
kdown: long--term and
a
short-te
s
erm tre
ends
Since
S
the first rreport in Marcch 2013, FTSE
E 100 firms ha
ave reduced th
heir exposure to developed equities by 6 percentage
points,
p
from 75
5% to 69%. Ovver that same period, FTSE
E 250 firms hav
ve reduced their exposure tto the same as
sset class by
12 percentage points, from 85%
8
to 73%.
However,
H
overr the last six months
m
specific
cally, the alloccation of FTSE
E 100 firms to global equitiess has remaine
ed broadly
le
evel, varying b
by just 1 perce
entage point, while
w
their allo
ocation to UK equities
e
has visibly decreassed, by 4 perce
entage
points.
p
Meanw
while, FTSE 25
50 firms have reduced
r
their allocation to global
g
equities by 4 percentaage points sin
nce October
2014,
2
while the
eir weighting to
o UK equities has stayed le
evel.
As
A part of these efforts to divversify, FTSE 100 schemess have increas
sed their alloca
ation to fixed inncome and alternatives, by
3 percentage p
points and 2 percentage points respective
ely. FTSE 250
0 firms have ec
choed this incrreased allocattion to fixed
in
ncome, which has increased
d by 6 percenttage points, b ut their weighting to alternatives has decrreased slightly
y by 1
percentage
p
point.
FTSE
F
100 and FTSE 250 firms’ allocations to emerging
g markets have
e remained ste
eady, with pollitical and economic
outlooks
o
still un
ncertain in the
ese regions.
Average
A
asse
et allocation
F
FTSE 100
March October
2013
2013
FTSE 25
50
Ma
arch October
2
2014
2014
March
2015
March Octobeer
2013
201 3
March Oc
ctober
2014
2014
March
h
2015
5
UK
U Equities
28
28
32
29
25
41
338
38
33
33
3
Global
G
Equities
s
47
48
45
43
44
44
445
45
44
40
0
3
5
5
4
4
2
3
2
2
2
10
8
7
10
13
7
9
7
9
15
5
Alternatives
A
8
8
9
10
12
5
6
7
10
9
Other
O
3
2
2
4
1
0
0
0
1
1
Emerging
E
Mark
kets
Fixed
F
Income
Average
A
as
sset allocattion – FTSE
E 100
Average
A
as
sset allocattion – FTSE
E 250
8
Individual scheme observations
Almost two-thirds of the default schemes analysed invest in fixed income (40 out of 65) with the average allocation to this
asset increasing to 14% in March 2015 from 7% in March 2014.
In total, 29% of the 65 schemes analysed have an allocation of at least 20% to this asset class, while a year ago this
weighting only applied to 3% of schemes.
Asset weightings – Fixed Income
64.0%
Percentage
70%
36.6%
39.0%
42.2%
43.9%
45.2%
45.2%
45.2%
45.2%
45.2%
45.2%
60%
40%
30%
20%
10%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
2.0%
2.4%
3.4%
5.0%
7.0%
7.0%
9.7%
10.0%
10.8%
10.9%
11.2%
11.6%
12.3%
14.0%
14.1%
14.2%
14.3%
14.4%
15.5%
16.2%
19.0%
19.2%
20.0%
20.0%
22.7%
25.0%
25.0%
26.9%
27.0%
27.0%
50%
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
0%
Fund No.
Over two-thirds of default schemes have an allocation to alternative investments (45 of the 65 schemes analysed) with a
maximum allocation of 50%.
Of these schemes, 20% have an allocation of at least 20%, compared to 16% a year ago.
Asset weightings – Alternatives
50%
50%
Percentage
60%
40%
30%
20%
10%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
1%
1%
2%
3%
4%
5%
5%
5%
6%
7%
8%
8%
8%
8%
8%
8%
10%
10%
11%
11%
12%
14%
14%
14%
14%
14%
15%
15%
17%
19%
21%
22%
27%
28%
30%
30%
30%
30%
32%
32%
32%
50%
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
0%
Fund No.
9
Schroders FTSE Default DC Schemes Report
For professional clients only. Not suitable for retail clients
Asset weightings - example
The Schroders Diversified Growth Fund (DGF) provides an example of how a scheme’s asset allocation can take a more
balanced and diversified approach, seeking to maximise return and mitigate risk. Over the past six months the Schroders
DGF has decreased allocation to developed equities from 53% to 48%, and has increased allocation to fixed income from
13% to 15%.
Equities (developed all)
Fixed Income
Schroders DGF
Average
Alternatives
Max
Emerging Markets
Other
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: Schroders DGF as at 31 March 2015
10
Schroders FTSE Default DC Schemes Report
For professional clients only. Not suitable for retail clients
The current DC marketplace at glance
The last twelve months have seen retirees handed over more control than ever before over their finances and pension
planning.
The 2014 Budget freedoms, which have given over-55s more flexibility about how to access their DC pension savings,
came into effect in April 2015. The freedoms introduced the option to withdraw money from the DC pot, with 25% of this
withdrawal tax free and the remainder subject to income tax.
They also introduced the uncrystallised funds pension lump sum (UFPLS) option – allowing members to dip in and out of
their defined contribution (DC) pots without having to purchase an annuity or drawdown. However, those opting for UFPLS
will not be able to leave their fund invested if they take the tax-free cash.
In the 2015 Budget, the Chancellor took pension reforms one step further, reducing the lifetime allowance that can be
saved into a pension from £1.25m to £1m.
He also confirmed plans to allow pensioners to sell their annuities. From April 2016, the government will change the tax
rules to allow people who are already receiving income from an annuity to sell that income to a third party, subject to
agreement from their annuity provider. The proceeds of the sale could then be taken directly or drawn down over a number
of years, and would be taxed at their marginal rate, in the same way as those taking their pension after April 2015.
According to figures from the Pensions Regulator, there are now over 4.5 million members of DC schemes – an increase
of 80% – largely as a result of the auto-enrolment policy. Over 300 schemes are currently being used for auto-enrolment,
with 87% of DC members falling within these schemes4.
4
Source: The Pensions Regulator (Annual Statistics, 1 January 2015).
11
Methodology
In order to gather a snapshot of the UK DC default funds during the accumulation phase the FTSE 100 and FTSE 250
firms were asked to supply data. This was supplemented by publically available information for their employees taken from
corporate websites. The DC default funds of 30 FTSE 100 and 35 FTSE 250 companies were analysed.
The subsequent data was then broken down into broad asset classes for analysis purposes. Information correct as at 22nd
April 2015. Research undertaken by Instinctif Partners on behalf of Schrodersi.
For further information, please contact:
Estelle Bibby, Senior PR Manager, Schroders:
Tel: +44 (0)20 7658 3431 estelle.bibby@schroders.com
Notes to editors
Schroders Plc
Schroders is a global asset management company with £319.5 billion (EUR441.6 billion/$474.3 billion) under management
as at 31 March 2015. Our clients are major financial institutions including pension funds, banks and insurance companies,
local and public authorities, governments, charities, high net worth individuals and retail investors.
With one of the largest networks of offices of any dedicated asset management company, we operate from 37 offices in 27
countries across Europe, the Americas, Asia and the Middle East. Schroders has developed under stable ownership for
over 200 years and long-term thinking governs our approach to investing, building client relationships and growing our
business. Schroder Investment Management Limited.
Further information about Schroders can be found at www.schroders.com
Issued by Schroder Investment Management Ltd, this is authorised and regulated by the Financial Conduct Authority. For
regular updates by e-mail please register online at www.schroders.com for our alerting service.
Important Information:
For press and professional investors and advisors only. This document is not suitable for retail clients.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an
offer or solicitation for the purchase or sale of any financial instrument.
The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is
believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be
accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services
and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document
and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic
decisions.
Schroder Diversified Growth Fund risk factors: The value of investments and the income from them may go down as well as up and investors may not get
back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. Investments in smaller
companies may be less liquid than in larger companies and price swings may therefore be greater than in larger company funds. Less developed markets are
generally less well regulated than the UK, they may be less liquid and may have less reliable custody arrangements. Investors should be aware that
investments in emerging markets involve a high degree of risk and should be seen as long term in nature. The fund invests in higher-yielding bonds (noninvestment grade). The risk of default is higher with non-investment grade bonds than with investment grade bonds. Higher yielding bonds may also have an
increased potential to erode your capital sum than lower yielding bonds. A small proportion of the fund may invest in unregulated Collective Investment
Schemes which may be closed for subscription/and or redemptions, may be subject to certain restrictions or limitations, and there is unlikely to be an active
secondary market in the shares or units of such underlying schemes. Investors should be aware that the fund may invest in derivatives and in alternative
investments (hedge funds, property funds and private equity) which involve an above-average degree of risk and can be more volatile than investment in
equities or bonds. The target return is an estimate and is not guaranteed. The yields quoted are not guaranteed and may rise and fall in the future. The fund is
not tied to replicating a benchmark and holdings can therefore vary from those in the index quoted. For this reason the comparison index should be used for
reference only.
Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA.
Registration No 1893220 England. Authorised and regulated by the Financial Conduct Authority. 942627
i 65 schemes analysed made up of 30 FTSE 100 Schemes and 35 FTSE 205 schemes. The number of pensions schemes surveyed has increased by 25
since the last report in October 2014 which may have a bearing on the percentage findings in this report.
12