Developed markets equities were the predominant asset class in asset allocation of trust-based defined contribution plans in the U.K. in 2017, said a report by Cass Business School, London.
The report was commissioned by the Defined Contribution Investment Forum, which consists of 12 money managers, and surveyed 20 corporate DC plans about their investment strategies in 2017.
It found that passive cap-weighted equities made up a significant proportion of the risk exposure in a default fund and often 100% in the growth phase. The main reason for the use of passive rather than active funds was cost, the surveyed plans said.
Some 85% of the interviewed plans used passive equity strategies in the early accumulation phase, while 60% used diversified growth funds and 35% used active equity.
Many of the plans combined passive equities with diversified growth funds and corporate and government bond funds in the late accumulation stage. Low cost indexed funds allowed them to integrate more strategies without violating the charge cap, the report said. The charge cap is set at 0.75%.
The surveyed plans also discussed the ways in which DC platforms operate among key barriers to integrating illiquid asset classes into DC portfolios. Some 40% of plans said DC investment platforms were making it difficult to incorporate illiquid asset classes into investment strategies.
While some large DC plans began to accommodate a drawdown investment option following the U.K. pension freedoms regulation, the report found that smaller plans still only offer cash and annuitization options at retirement.
Andrew Clare, professor of asset management at Cass Business School and lead researcher on the report, said in a news release: "The report identified some of the innovative approaches that some schemes have implemented since the introduction of freedom and choice. It also highlights some of the challenges that trustees and their advisers have to face as they strive to offer scheme members the sort of investment opportunities that are routinely available to DB members."
Rob Barrett, chairman of the DC Investment Forum, added in the news release: "It is clear that the next few years will be pivotal, as more and more data become available on the decisions people are making, allowing schemes to continue to tailor their investment options, with the help of their advisers and investment managers."
