FTSE pension schemes invest mainly in equities

More than three-quarters (79%) of average asset allocations for FTSE 100 and FTSE 250 defined contribution (DC) pension schemes are in equities, according to research by asset management firm Schroders.

The DC default research, which looked at 16 FTSE 100 companies and nine FTSE 250 companies, found that global equities, including European, had the highest allocation of all equity classes with 46%, compared to 33% of domestic (UK) equities. On average, just 2.9% of average asset allocation is invested in emerging markets.

Looking specifically at the portfolio allocation of an average FTSE 100 DC default fund, the majority of assets were held in three key classes: global equities (47%), UK equities (28%) and fixed income (10%). The rest of the portfolio (15.5%) was split between cash, property, hedge fund/absolute return, commodities and other asset classes.   

The research compared these findings with an average FTSE 250 DC default fund. FTSE 250 schemes were found to be more weighted towards global equities, with 45% of overall assets allocated to this asset class. This was followed by UK equities at 41%, fixed income at 7% and other alternative assets, which accounted for just 7%.

Stephen Bowles, head of DC at Schroder (pictured), said: “This research is specifically looking at DC default funds in the accumulation stage.

“It has shown that there’s a wide divergence among default DC schemes in terms of asset allocation. However, it is clear that many of the employees of the UK‘s largest employers have no exposure to a wide range of alternative asset classes. 

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“Surprisingly, the average DC default strategy of a FTSE 100 or a FTSE 250 company today appears not to have diversified away substantially from pure equity exposure. 

“This indicates that trustees have hugely different opinions as to how they believe their investment strategies can best be achieved. Alternatives account for just 11% of an average portfolio and therefore this does throw into doubt the widespread belief that diversification is already the ‘new normal’ in DC.”