As part of an ongoing review of our asset allocations tools and processes, we will be making some changes to our asset allocation process and assumptions to ensure they remain relevant and up to date.
These updates will take place in December 2021 alongside the regular update to our asset allocations, following the review of the underlying assumptions by Willis Towers Watson.
The changes
We are making changes to how we calculate the risk targets for each risk level, to the underlying assumptions of the international fixed interest and UK fixed interest asset classes, and the underlying splits of international equity applied within our standard asset allocations.
- Simplifying and refining the accuracy of our risk targets
We are simplifying the way we set our ten risk targets to help make them more transparent as well as easier to understand. Going forward, the risk targets for levels 1 to 10 will be spread at 10% intervals of global equity (incl UK) volatility. For example, the risk target for risk level 5 will be 50% of global equity (incl UK) volatility, risk level 6 will target 60% of global equity (incl UK) volatility, etc. The risk bands will continue to range from the mid points between each risk target.
Historically, risk level 10 had been set using a static allocation of 10% UK equities and 90% international equities (ex UK) and risk level 1 was anchored to the volatility of cash/money market funds.
The new method will help simplify the rather complex structure of the past. Importantly, we hope this will make it much easier for advisers and customers alike to understand the risk target for each risk level. - Updating the underlying assumptions for the UK and international fixed interest asset classes
To better match the current investment environment, for UK and international fixed interest we will make the following assumption changes:
- International fixed interest – This assumption is currently driven by the volatility and return assumptions of unhedged global bond investments. After reviewing the proportion of such funds that are hedged back into sterling, we are revising the assumption to be based upon a composite of global bond investments that are 50% hedged into sterling and 50% unhedged.
- UK fixed interest – This assumption is driven by the volatility and return assumptions for UK corporate bonds and UK government bonds. We have updated the split between these two sub-asset classes to 77% UK corporate bonds and 23% UK government bonds from the previous split of 82.5% and 17.5% respectively. Again, this update is based on the mix across our platform.
- Updating the underlying splits for the international equity asset class
We have updated the split for international equity in line with more recent GDP weights of the various regions of the world. This only impacts our asset allocation models. International equity is pro-rated according to the below splits:
Previous Split New Split Difference Emerging markets 12.00% 9.50% -2.50% Far East ex Japan 24.00% 26.50% 2.50% Europe ex UK 19.00% 17.50% -1.50% North America 24.00% 25.50% 1.50% Japan 6.00% 6.00% - Global specialist 15.00% 15.00% - Total 100% 100%
You can find full details about the assumptions we use across our asset allocations and details of our regular updates here.