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The Actuary The magazine of the Institute & Faculty of Actuaries

70% of FTSE 100 firms now offer diversified growth funds

The number of the UK’s leading firms offering diversified growth funds as an option in their defined contribution pension schemes has increased by more than 50% over the past 12 months, according to Towers Watson.


Research published by the consultancy yesterday revealed that 70 of the FTSE 100 firms now offer DGFs, compared to 43 a year ago. DGFs are funds that invest in a wide range of asset classes with the aim of achieving long-term capital growth at a lower risk than equity funds.

The research also found that 92% of the FTSE 100 firms’ schemes now offer a default investment strategy, up around 10 percentage points from last year. The vast majority of these are lifestyle strategies that include DGFs. Under a lifestyle strategy the asset mix in a fund becomes less risky as a participant gets older.

According to Towers Watson’s research, over half of FTSE 100 DC pension schemes have more than 90% of their members involved in their default investment option.

Chris Smith, senior investment consultant at Towers Watson said this showed how important it was for pension funds to get their default investment option right.

‘To achieve this, many fiduciaries have segmented their memberships by individual risk profile, through a risk-assessment exercise, in order to tailor the default option, using DGFs where suitable,’ he explained.

Based on the consultancy’s research, around a fifth of the FTSE 100 companies have carried out a risk assessment exercise to choose a default fund that is suitable for the majority of their members and has a clear audit trail for governance purposes.

Towers Watson also found that almost 70% of the FTSE 100 already automatically enrolling employees onto a pension scheme have more than 80% of the members of that scheme in the default option. This compares to around two thirds when employees have to apply to join the scheme.

However, it also found that one fifth of FTSE 100 DC schemes do not currently comply with the principles for offering a default investment option set out by the Pensions Regulator’s Investment Governance Group. Most of the non-compliant schemes are contract-based – run by a pension provider such as an insurance company – rather than run by trustees.

‘While it is disappointing that contract-based schemes continue to play catch-up, the fact is that the significant majority of trust-based DC schemes now comply with the IGG principles,’ Mr Smith said. ‘This suggests that employers and trustees have recognised that good governance is at the heart of a well-run scheme and important for achieving good member outcomes.’

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