Real estate and emerging market government debt have both been introduced to Scottish Widows’ pension defaults following a strategic review of its asset allocation strategies that also sees currency hedging introduced.
The provider says the changes to Scottish Widows Pension Portfolio Funds, which underpin its default workplace pension offering, and Retirement Portfolio Funds, are projected to deliver better returns for the same level of risk through greater diversification, with no extra fees.
The changes, which also include the integration of environmental, social and governance factors, will be implemented in phases from Q3.
The provider says challenging markets mean investors should expect lower projected returns and potentially continued volatility in future, exacerbated by the impact of Covid-19.
Scottish Widows will also reduce the ‘home bias’ of the funds by allocating less to UK equities and bonds, and will align the split of investments in overseas equities closer to a market-capitalisation basis. The provider will adjust positions based on their long-term return assumptions for each region.
Currency hedging is being introduced on around 50 per cent of overseas developed market equities to help optimise returns in flat or more volatile markets, as well as providing greater diversification.
Diversification is being increased through the introduction of two new passively-managed asset classes: real estate investment trusts (Reits), and emerging market government debt (EMGD), which together will make up on average 7.88 per cent of portfolios. Scottish Widows says both have proved to be positive contributors to future returns in its modelling, showing low correlation to other assets.
ESG factors are being integrated through Scottish Widows responsible investment principles, which will see it backing businesses that decrease carbon emissions, increase clean technology revenue, reduce water consumption, and improve waste management. More details on how this will be achieved will be announced later in the summer.
There will be increased exposure to US equities as we move to benchmark allocation of regional equities on a pro-rata market cap (ex-UK) basis.
Investment grade bonds will be split 40 per cent UK, 60 per cent global across portfolios, with overall allocations to equities and bonds slightly reduced, in particular, UK investment grade bonds.
There will be a small allocation to cash, averaging 1.75 per cent, in lieu of Gilts given their historically low yields.
Scottish Widows head of pension investments Maria Nazarova-Doyle says: “We believe strategic asset allocation has the biggest impact on long-term performance. Selecting the types of assets used and combining them into the most effective blend is typically held to account for around 80 per cent of the performance of any multi-asset fund.
“We regularly review and adapt our multi-asset funds as the market environment changes, and it’s clear that the investment outlook is shifting, exacerbated by the Covid-19 impact. We’ve introduced these significant changes to ensure customers benefit from the new environment.”
“We have worked hard with our fund manager partners to ensure we can make these enhancements without any increase in charges to customers.”