A survey of more than 200 UK defined contribution (DC) schemes indicates that alternative asset classes and integration of environmental, social and corporate governance (ESG) criteria are struggling to gain ground in DC investment, Aon has said.

Six per cent of the schemes surveyed indicated they would like to extend their range of investment options to incorporate additional asset classes beyond those currently available from the DC platform, the consultancy said.

Chris Inman, head of DC investment advisory at Aon, said: “The finding that the vast majority of DC schemes are comfortable with the current asset classes and strategies available to them came as a surprise given the industry’s focus on exploring ways in which DC members can benefit from a more diversified set of investment opportunities.”

He suggested that schemes may see adding alternative asset classes their range of investments as extremely challenging.

“Some schemes may feel that their current governance structures or knowledge levels are not suited to monitoring these types of investments effectively. There may also be concerns about potential delays in accessing illiquid investments when schemes need to pay benefits,” he said.

“Schemes should be confident that these issues can all be solved by discussing and getting a better understanding of how alternatives can fit into their DC investment strategy – and will help improve diversification and outcomes for their members.”

ESG results ‘underwhelming’

Aon also highlighted survey findings relating to responsible investment, which it said was gaining increasing importance for DC schemes on the back of societal pressure and regulatory requirements.

According to its survey, the most popular approach, taken by around two in five schemes, is to offer one or more self-select ESG investment options to their members, either through design or based on their provider’s standard offering.

Only half as many again then actively incorporated ESG principles on behalf of members.

Joanna Sharples, partner at Aon, said: “The result that a mere 10% of respondents assess all their DC investments against ESG criteria, while only 8% incorporate investment in one or more ESG specific funds within their default strategy, is rather underwhelming.”

There was much to be gained from doing more in the area of responsible investing, she suggested.

“Schemes that can share ‘good news’ with their members about how their pension savings are working to make the world a better place, as well being invested to grow, should be able to engender pride and raise engagement with their members,” she said.

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