In his Budget speech the Chancellor called for DC schemes to disclose UK holdings, but all the main providers already do, covering over 15 million UK pension savers, via Corporate Adviser’s Master Trust and GPP report. However results show those with higher UK equity weightings are typically underperforming peers with little exposure to the domestic market
Exposure to UK equities ranges from zero, for Aegon Master Trust and TPT Retirement Solutions’ master trust, to The Lewis Workplace Master Trust, which had 34 per cent in British shares at 31.12.22.
The figures come from Corporate Adviser’s last Master Trust and GPP report 2023, a copy of which can be downloaded here.
Last week the Chancellor Jeremy Hunt called for DC pensions schemes to disclose their UK holdings, and warned that steps could be taken to boost internal UK investment if this was deemed to be falling short of international best standards.
But the leading master trust and GPP providers already disclose this information to Corporate Adviser, as part of the annual Mater Trust and GPP report, at least for their listed equity holdings. Nest has the fourth-lowest UK equity exposure at 1.9 per cent, although it does hold some real assets not reflected in this figure.
However these figures might make disappointing reading for the Chancellor, as they show that those with higher allocations to UK equities have typically underperformed their peers over the past five years, when it comes to delivering returns for members.
Figures from the last report show The Lewis Workplace Master Trust has the highest exposure to the UK stock market, with 34 per cent of its default fund (for younger savers, 30 years from retirement) in UK equities. In contrast it has 66 per cent in overseas equities, and no exposure to bonds, cash, property or other investments at this stage.
The latest report is currently being compiled and will published in April, where these allocations and performance data will be updated to show figures to 31.12.23.
Other master trusts with significant UK exposure include Royal London, with a 29.07 per cent exposure, and Aegon Workplace Default (its Retirement Choices default for its GPP), which has a 20.02 per cent allocation. However Aegon TargetPlan, its Master Trust offering, has zero exposure to the UK equity market.
Scottish Widows, Smart Pension and Standard LIfe all have above 10 per cent of their default in UK equities, with allocations of 16.99 per cent, 14.4 per cent and 10.4 per cent respectively.
At the other end of the scale TPT Retirement and Aegon’s Master Trust do not invest in the UK listed stock market. Meanwhile Nest has just a 1.9 per cent allocation, while National Pensions Trust, Cushon, Mercer Workplace Savings and LifeSight Master Trust all have less than 5 per cent.
The average allocation is around 8 per cent across the 23 largest master trust and GPP default funds.
There have been concerns from many in the industry that a focus on boosting UK investments — which may include bond holdings as well as investment into start-ups and other private market holdings — may impact performance for members. This is seen as particularly pertinent since the Chancellor stressed in his Budget speech that the government would be pressing ahead with its Value for Money reforms, which would see underperforming DC pensions schemes closed to new members.
Figures from AJ Bell published showed that the UK stock market has seriously underperformed other major markets over the past decade: with the ABI UK All Companies funds delivering an average return of 40.7 per cent over the past 10 years, compared to 248.2 per cent for the ABI North America Equity funds and 143.2 per cent for the ABI Global Equities funds.
This underperformance is borne out in this Corporate Adviser data. Looking at the performance of these default funds, as measured by the CAPA index, the defaults with the strongest performance over five years all have lower than average exposure to UK equities.
The top performers were Aon, whose managed core retirement pathways delivered a cumulative return of 53.4 per cent over five years for younger savers. This was followed by NPT (50.5 per cent) and SEI Flexi Default (43.9 per cent). For full details on master trust and GPP default performance go to www.capa-data.com.
These three defaults respectively had 5 per cent, 4.4 per cent and 5.2 per cent allocations to the UK stock market — and all had around 95 per cent of their defaults invested in overseas equities, which appears to be the primary driver of this outperformance. These funds all had very little expsoure to bond and fixed income markets.
Those with the highest allocation to UK listed equities have not performed as strongly.
The Lewis Workplace Master Trust did deliver cumulative returns of 28.3 per cent over the past five years for its younger savers, which puts it just above the CAPA average of 25.8 per cent over this period.
But this is bucking the trend. The other trusts with more than a 10 per cent exposure to UK equites have all underperformed. This includes Royal London, which delivered a 23.9 per cent cumulative return over this period, Aegon Workplace Default (GPP) which delivered a 20.3 per cent return, Scottish Widows which delivered a 17.9 per cent return, Smart Pension which delivered a 22.1 per cent return and Standard Life which delivered a 11.1 per cent return. All were below the CAPA average, with Standard Life being the second worst performing master trust or GPP over this period.
This performance may not be solely down to the relatively high allocation to UK equities of course. These underperforming funds all have relatively high bond allocations, which have not delivered the same high returns as equity markets over this period. It is notable that the Lewis Master Trust, which had both a high UK equity exposure and above average returns is 100 per cent invested in equities. Most of the defaults with high UK equities were also more diversified with gilt, bond, cash and in some cases property allocations.
The two trusts with zero allocation to the UK stock market (Aegon Master Trust and TPT Retirement) have both delivered above average returns.
This will detail allocations to cash, government bonds, index-linked bonds, corporate bonds, UK equities, overseas equities, property and other asset classes, such as private markets and infrastructure for all the leading master trust and GPP defaults. Allocations are given for those in the growth phase (30 years from retirement) as well during the glide path to retirement, with figures given for savers both five years and one day from their retirement age.
