Workplace Savings - Isio Blog 4

20 Nov 2020
Computer screen showing graph of improvement over time

Workplace Savings - An Isio Blog

Blog 4, November 2020

All aboard the equity rollercoaster

Who is this for? DC scheme Trustees, Governance Committees and Pensions Managers

Over the last decade DC schemes have delivered steady growth with equity returns boosting member pots. This year we have seen markets slide, recover, stabilise, and rise again on the back of vaccine developments. Indeed it’s a rollercoaster ride with many twists along the way. The good news is global equities are up by 7.5%* in 2020** - at face value benefitting members in the growth phase where defaults invest heavily in equities.

But sometimes we need to look deeper. Overseas equities have performed strongly, returning 8.9%* in 2020** with US/Japanese markets delivering double digit returns. However the “Big Dipper” has been the UK with the FTSE 100 falling by 14.2%*. Whilst overseas markets have benefitted from tech stock returns, the UK has suffered through exposure to energy and financial stocks.

What does this mean for DC schemes? A high equity allocation might appear beneficial: sitting tight for a bumpy ride, white-knuckle scares in the Q1 “Haunted House”, but you may have survived the journey unscathed. However, regional equity allocation is critical with 20% difference between overseas and UK returns in 2020**.

Many Mastertrust defaults initially invest solely in equities, but performance differs based on how those equities are regionally allocated. Currently the UK is under 5% of global market capitalisation which some providers reflect in defaults, whilst others hold over 20% in the UK. Can this be justified?

This probably depends whether you think FTSE 100 dominant sectors will significantly improve and whether large tech giants can continue to grow. If heading to your local funfair, seek out the “Fortune Teller” and see if they can give any clues. What will the US election, Brexit negotiations and the vaccine hunt mean for equities in 2021? Which sectors and markets stand to benefit?

Do you know how your DC scheme default strategy is invested heading into 2021, and is it relying purely on equities for returns? Do you know if your scheme default is evolving with the times or out on a limb? Do get in touch.

** 2020 returns from 1/1/20-11/11/20

* Market returns in £

Mark Powley is an Associate Director at Isio. Email him directly here.

Workplace Savings - Isio Blog 4 PDF