Alternatives and ESG floundering in DC investment

Hope William-Smith reports...

Defined contribution (DC) schemes are mostly content with the current asset classes available despite the industry’s push into proving members can benefit from diversified investments underpinned by strong ESG integration.

Aon quizzed more than 200 DC schemes covering £50bn in assets and half a million members and found just 6% of schemes would like to extend their range of investment options to incorporate additional asset classes beyond those currently available from the DC platform.

Head of DC investment advisory Chris Inman said the findings “came as a surprise” given the agreed benefits of portfolio diversification.

Despite the prevalence of alternative investment options, many schemes continue to struggle with a knowledge gap in alternative investments, he added.

“Some schemes may feel that their current governance structures or knowledge levels are not suited to monitoring these types of investments effectively,” he said.

“Adding alternative asset classes to a DC schemes’ range of investments can seem extremely challenging [and] there may also be concerns about potential delays in accessing illiquid investments when schemes need to pay benefits.”

While rules around diversification have tightened following The Pensions Regulator’s new requirement for DC trustees to state their financial and non-financial policies in relation to ESG, the most popular approach is still a simple one.

Aon found two in five schemes offer just one or more self-select ESG investment option to their members, either through design or based off the provider’s standard offering.

Aon partner Joanna Sharples said: “It’s rather underwhelming when our survey found that over 85% of UK investors consider responsible investing to be at least ‘somewhat important’ with the majority of savers saying that they would be more engaged with their pension savings as a result of responsible investing.”

She added: “There is a remit to do more in this area; schemes that can share good news with their members about how their pension savings are working to make the world a better place, as well as being invested to grow, should be able to engender pride and raise engagement with their members.”