DC default schemes offered strong performance in 2025, providing good returns for members across the board. This is according to Howden Employee Benefits’ annual DC default investment strategy research, which covers 28 default arrangements with a total £500bn under investment and over 30 million members.
In the growth phase - used for members with some time before retirement - 100% of providers outperformed Howden’s target - specifically beating inflation plus 4%. 71% of providers outperformed Howden’s passive portfolio test – that is, a comparison of the performance of each provider’s portfolio to the returns of a passively managed portfolio with the same mix of return-seeking and defensive assets. Outperformance is massively up from 2024, which saw only 19% outperform.
The strongest growth performer was LifeSight at 20.6% returns, leaving a 13.1% gap between the highest and lowest performer.
Volatility was higher in the growth phase in 2025 than in 2024 - with one strategy seeing 14.2% volatility, compared to highs of 8.7% in 2024.
In the ‘at retirement’ phase – when members are about to access their savings - 100% of providers outperformed Howden’s performance target - in this phase, beating inflation plus 2%, as well as outperformance of cash and annuity pricing. Again, 71% of providers outperformed the passive portfolio test – up from 29% last year. The strongest performer was LifeSight’s Higher Risk Drawdown Lifecycle strategy at 12.7% - leaving a 5.4% gap between the best and worst performers throughout the year.
Volatility changes were more muted year-on-year in the retirement phase, suggesting a return to favour for diversification.
Asset allocation in focus
After several years of large increases in allocations to funds with emission-reduction targets, that progress has slowed. In the growth phase, the average allocation to these funds increased from 73% to 77% over the year. This 4% increase compares to a 38% increase since we first reported in 2021. In the ‘at retirement’ phase, there has been no change in the average allocation to these funds over 2025, but a 25% increase since 2021.
Sustainable investment within DC default funds has entered a new phase, with attention having now shifted away from managing risks and towards accessing opportunities, including in private markets,
Despite the noise, private markets allocations remain limited in existing strategies, and their impact on relative returns remains muted. The average net exposure to private markets across all growth portfolios remains at circa 4% -which includes private equity, private debt, property, and infrastructure. In the ‘at retirement’ portfolios, allocation is even lower, at circa 3%.
But longer-term, many are already targeting allocations above the policymakers’ ambitions - the average target allocation is 10% in private markets. The most ambitious schemes are targeting over 25% in the growth phase. Overall, there are four schemes targeting 20%+, and sixteen targeting 10%+.
Some providers offer multiple strategies, giving their clients choice around the level of private markets, meaning strategies with minimal/no private markets will water down the averages. The allocation to private markets will be lighter in ‘at retirement’ portfolios, and Howden reports a different underlying mix of assets too - e.g. a higher weighting to private credit.
Many schemes are also considering how sustainability and private markets can work in tandem - for example, renewable infrastructure is growing in popularity within private markets portfolio, and the green bond market is growing.
Alex Toney, Head of DC Default Research at Howden, comments: "The DC market celebrated a good year in 2025 - all members using these flagship default strategies, be they early in their careers or coming up to retirement, saw strong returns. Most schemes passed our passive portfolio test, aided by North American equities delivering weaker returns.
“But the real test starts now. With less than five years until the Mansion House deadline, we expect to see a rapid shift in strategic positioning. Private market advocates promise enhanced returns, diversification, and access to long-term growth themes, yet the evidence is clear; manager selection and skill drive the majority of outcomes.
“In fact, this is true outside of private markets too - the best performers need the right tech, the best people, and the ability to scale-up portfolios at speed. 2026 is the year for DC providers to invest in themselves to ensure they have the experience and governance structures needed to consistently make the right calls, in complex asset classes like private markets, impactful strategies like currency hedging, and tumultuous markets like the AI tech market. Ultimately, the race is on to deliver the best member outcomes as DC market competitiveness reaches new heights.”
|
