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Schroders FTSE DC report starts to evidence investment diversification

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Schroders’ fourth FTSE DC report is, for the first time since its launch, starting to evidence investment diversification in some of the largest defined contribution schemes in the UK. 

The report shows that a typical default DC fund of a FTSE pension scheme has decreased its exposure in developed equities to three quarters (75 per cent) of the overall fund allocation – down from 80 per cent in March 2014.
 
FTSE 100 firms’ default DC funds have decreased UK equity exposure by 3 percentage points (down from 32 per cent to 29 per cent) and global equities by two percentage points (45 per cent to 43 per cent). This takes overall developed equities exposure to 72 per cent of the total allocation, the lowest proportion since our research series began.
 
FTSE 250 firms have seen the greater change, decreasing UK equity exposure by 5 percentage points (38 per cent to 33 per cent) and global equities by one percentage point (45 per cent to 44 per cent). This takes total allocation to developed equities to 77 per cent, down from 83 per cent in March 2014.
 
Fixed income and alternatives have both seen a slight resurgence, rising by two percentage points respectively in the last six months. The typical default DC scheme of a FTSE pension scheme now has nine per cent in fixed income and 10 per cent in alternatives.
 
Over half of schemes analysed (26 out of 40) invest in alternatives, such as property, private equity and hedge funds, this asset class has seen the greatest increase in weighting range with the maximum allocation increasing from 34 per cent in March 2014 to 43 per cent currently.
 
Stephen Bowles, head of defined contribution at Schroders, says: “At a recent conference we asked attendees if they thought the increased flexibility announced in the spring 2014 budget was a good thing for DC pensions, 84 per cent of respondents replied yes. We also asked if DC schemes will need to have multiple default investment strategies to target different outcomes i.e. annuity, cash and drawdown. An overwhelming 78 per cent of participants responded yes to this question.  
 
“It is very encouraging to see evidence of diversification starting to come through in the latest report findings. We firmly believe diversification is a key element in defined contribution default investment design.”

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