Investment Themes

The DC Future Book

Edition seven – The DC Future Book

Columbia Threadneedle Investments has supported The DC Future Book since its inaugural publication six years ago. We are pleased to see that it has become the foremost longitudinal study of the UK Defined Contribution (DC) market we envisaged it to be.
This is a special edition indeed – it is the first time that the Pensions Policy Institute has been able to track DC market activity against the backdrop of a major crisis. Chapter 4 specifically looks at the impact of the Covid-19 pandemic on DC investment strategies, how trustees have responded and what valuable lessons can be learnt.
Over the last 18 months, market movements have been a picture of contrast. In early 2020, at the beginning of the pandemic, we saw periods of extreme market volatility impacting valuations. Through the interventions of governments and central banks many markets were then propelled back to, or even above, pre-pandemic levels. This recovery was fast paced and much quicker than that of preceding crises.
Encouragingly, DC schemes’ long-term investment horizons and diversified portfolios meant that they have been able to withstand the market volatility and protect their members, a large proportion of whom are invested in default funds. Due to the unprecedented nature of the crisis, many DC scheme trustees also did not make changes to their schemes’ investment strategies. This has protected them from investment losses and allowed them to benefit from the subsequent recovery.
While this has meant that the positive trends in the UK DC market, such as growing aggregate assets and median DC pot sizes, have continued, this is not the time for complacency. Making no or little changes to investment strategies turned out to be the right approach this time, but a prolonged market downturn could have resulted in a much worse outcome for DC scheme members.
We would encourage all pension trustees to take the experience of Covid-19 as an opportunity to work ever closer with their advisers and asset managers to assess the resilience of their schemes’ default funds. There are several measures DC schemes can take to improve member outcomes, as Columbia Threadneedle’s Andrew Brown explores in his article on page pg47 including diversification into asset classes such as infrastructure and real estate.
Finally, we should not forget that the pandemic has, in some instances, also presented opportunities for investors with a good understanding of where longer-term returns may be found. Sectors such as technology and online sales, for example, have experienced growth during this period. Covid-19 has also brought to light a heightened awareness of Environmental, Social and Governance (ESG) factors, particularly around social issues such as health and labour practices. This shifting emphasis among investors highlights how rapidly ESG issues can evolve, underscoring the importance of trustees being both proactive and flexible in their approach to responsible investment considerations.
We are pleased that The DC Future Book continues to promote a better understanding of trends and themes in the UK DC pensions market. It allows us as asset managers to engage in dialogue and continue to provide the right investment solutions for our clients.

We hope you enjoy reading it.

1 Increase during the 12 months to 30 July 2020, Bloomberg

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