22 October 2019

The upcoming changes to pension default funds

As a result of increased economic uncertainty for UK markets over the last couple of years, leading UK pension providers have been changing their default fund investment strategies to increase returns for investors. By way of a reminder, a Default Fund is a pension fund in which member is automatically invested when they initially join the employer’s pension scheme. Upon joining and at any point afterwards, they have an option to change their investments.*

Pension providers are in the process of writing to employers to tell them about these changes, and we thought it may be of interest to provide you with an overview.

Fund managers have been facing a growing challenge of producing the returns their investors expect in an environment of reduced domestic economy growth and increased volatility for UK markets.

To address this, default fund managers are looking more closely at asset allocation, and they are moving a large proportion of funds away from UK equity and bonds to overseas where returns are likely to be higher.

Please see below for a little more detail on the strategies being adopted by the main players:

Aviva: Aviva went further than simple asset allocation amendment – they have changed their underlying fund manager to BlackRock. BlackRock have not only increased equity allocation across all risk profiles of the default investment strategy, but they have moved approximately 80% of equity from UK companies to overseas entities. They have also replaced gilts with overseas government bonds.  These changes will happen gradually over the next couple of months and are scheduled to be complete by the end of the year.

  • Standard LifeStandard Life has followed Aviva by increasing investment in overseas equities and moving funds away from UK equity and gilts. Standard Life investors will also see a slight increase in the fund’s risk – a modest increase in risk for the Balanced fund and a more significant shift for the Adventurous fund. Overall, all funds will be more heavily invested in equity (particularly overseas) and move away from gilts and absolute returns.
  • Scottish WidowsCompared to its peers, Scottish Widows are keeping their existing investment strategy unchanged (perhaps they have more faith in UK markets?), but they are introducing the Lifestyling function to the older investments funds which means they will be targeting drawdown as a preferred way of taking retirement benefit – it has already been introduced to Pension Investment Approaches. This can, however, be changed if investors would like to access benefits differently.
  • Royal LondonRoyal London are maintaining their Investment Clock approach with their target for the upcoming quarter to be overweight in equities, but underweight in bonds, gilts, commodities and absolute returns.

*Research suggests that more than 90% of UK pension scheme members are invested in their scheme’s default investment fund.