European defined contribution plan executives and participants are making portfolio tweaks as the COVID-19 outbreak forces them to react to strained markets.
Sources said the damage to DC portfolios has become more apparent in the last weeks, with market contagion affecting decisions about DC asset allocations across Europe. Executives said they are having to react to a host of issues stemming from the virus fallout, such as declining equity markets, suspensions of real estate funds and widening of corporate bond spreads. In turn, DC plan executives are having to figure out where to redirect contributions, with some investing new contributions in cash strategies because of internal rules. Some DC plan executives in the U.K. and Denmark have pulled back from investing in equities or saw their managers reduce equity risk in multiasset funds.
U.K. multiemployer plans, known as master trusts, had about 60% of their allocations in equities, according to the U.K. Investment Association's survey published in September 2019. About 27% of master trusts' allocations was invested in fixed income, 10% in real estate, 2% in cash and 1% in other strategies.
Between 10% to 25% of participants are enrolled in self-select options of DC plans in the U.K. and the Netherlands. These participants are reacting to the impact of markets on their investments by exiting equity investments and moving into cash strategies, industry experts said.
About 17 million participants were enrolled in U.K. DC master trusts, with about 91% of them being fully invested in default funds, according to the 2019 edition of the U.K. Pensions Policy Institute's survey. By comparison in the Netherlands, about 80% of plan participants enrolled into DC arrangements are fully invested in the default funds, according to an estimate by consultant Ortec Finance BV.
But sources said having too much cash at the moment should be taken with caution. "Too much capital protection means you won't get that growth in the long term. You need exposure to growth assets," said David Bird, London-based head of proposition development at LifeSight Ltd., the £7.5 billion ($8.7 billion) multiemployer defined contribution plan of Willis Towers Watson PLC, in a tele- phone interview. Mr. Bird said plan participants enrolled into self-select options of LifeSight are attempting to derisk their portfolios. "All sorts of people are doing this. Some of them, I'm afraid, are panicking in doing that," he said.
"They are coming out of equities to cash and maybe into bonds," he added. Figures were not available.
In the Netherlands, too, sources said DC plan participants are increasingly changing the asset allocation of their self-select portfolios. Martijn Vos, partner and managing director at Ortec, said equity allocations fell some 20% in these portfolios as plan participants moved to cash. Mr. Vos estimated that 20% to 25% of all DC plan participants are in self-select options.