AI-related stocks drive growth for younger generations in DC default investment strategies

Younger defined contribution (DC) pension scheme members have benefited from the technology sector’s continual dominance in global markets over the last year, according to analysis from Hymans Robertson. The DC Provider Report published today, finds that younger DC scheme members who are around 30 years from retirement have benefited from their higher exposure to equity markets, which have been dominated by US technology stocks associated with AI. 

The report from the leading pensions and financial services consultancy assesses the member outcomes of default investment strategies of both master trusts and group personal pensions over the last five years. It examines three sample members, at three different stages of the retirement savings journey, and looks at how their incomes have changed since 2019.

The analysis firstly looks at someone who is 30 years from retirement – who will have experienced positive, but varying, levels of performance. It shows that the more assets this member has allocated to equity, in general, the better they will have fared. 

Secondly, the report examines someone who is ten years from retirement. It shows two significant things happening for them. Their investments have recovered from the period of volatility in the bond market during 2022. At this stage of saving, most members have begun to de-risk their investment strategy. 

Finally, the report examines someone in the pre-retirement phase – around five years to retirement. It points out that at this phase, reducing risk is the norm, to provide certainty up to and throughout retirement. As DC pot sizes are expected to become larger over time, there will be a growing demand for more pre-retirement and post-retirement strategies. 

Commenting on the positive outlook for all members, Shabna Islam, Head of DC Provider Relations, Hymans Robertson, says:

“Returns have been strong within the equity market over the last 12 months and it’s particularly pleasing to see that younger members have gained from their higher allocations to equity, as technology and AI-related stocks have dominated the markets. The sector, as a whole, has consistently outperformed over the last few years. 

“We expect further developments in provider defaults with the introduction of private market assets in strategies. If this trend continues, we believe providers will begin introducing additional ‘premium’ defaults at an increased cost point – incorporating a higher allocation to private assets by as much as 10-15%.

“Over the past few months, we have witnessed the attention given to the DC market from the government, with the recent consultation on Unlocking the UK pensions market for growth. Consolidating smaller pension funds into mega funds, with £25-50 billion of assets under management, will have a large impact on DC pension providers and their default investment strategies. 

“Consolidation will have positive implications, such as the opportunity for more private market investment, ultimately leading to better outcomes for scheme members. However, small schemes should still be able to innovate and drive positive change.” 

Hymans Robertson’s DC Provider Report can be read here.