Defined contribution (DC) pension schemes reported mixed returns over Q1 2025, as strategies with a greater allocation to equities saw weaker performance than more diverse strategies, which provided some downside protection, Isio has revealed.

Despite a strong finish to 2024, which caused optimism heading into the new year, Isio found that this momentum proved hard to sustain.

According to Isio, Q1 saw rising tariff uncertainty rather than expected pro-business policies, as fears of slower US growth and higher inflation triggered a sell-off in US equities, a rally in gold, and a shift away from US markets.

However, some all-equity provider defaults performed better, benefiting from their regional equity allocation and an underweight position in the US market.

Indeed, there has been a shift to more short-duration exposure to protect against volatility at retirement and safeguard older members’ assets from adverse market impact.

“Broadly, DC strategies with greater allocation to equities saw weaker performance over the quarter, and more diverse strategies provided some downside protection,” explained Isio investment director, Sukhdeep Randhawa.

“However, it is worth noting that a couple of the all-equity provider defaults performed better, primarily due to their regional equity allocation and an underweight position in the US market, which proved beneficial.

“Looking at the longer term, higher equity allocation strategies continued to deliver stronger returns,” he continued.

“Interestingly, one of the early adopters of private markets has outperformed the peer group average over all time periods,” added Randhawa.

Meanwhile, over the quarter, UK gilt yields saw little overall change despite facing turbulence in March as government finances were scrutinised.

Investors experienced modest negative total returns, with shorter-duration gilts outperforming longer-dated counterparts.

Similarly, UK corporate and high-yield bonds delivered positive total returns, offering stability amidst market fluctuations.

Isio also noted that over the quarter, retirement-phase performance was largely flat but outperformed the growth phase and protected DC pot values in the de-risking stage of strategies.

Those adopting a more defensive investment approach— characterised by higher allocations to cash and lower exposure to equities—generally fared better, demonstrating the value of risk-averse strategies in periods of market uncertainty.

“In recent years, there appears to have been a shift towards shorter-duration assets, initially driven by concerns about the potential for rising interest rates and the desire to
reduce volatility as members approach retirement,” claimed Randhawa.

“However, adjusting duration levels is not always straightforward, particularly for schemes
heavily invested in passive strategies that aim to track broader market indices and limit the provider’s ability to tailor underlying exposures to manage duration risk effectively," he suggested.

“This inflexibility can pose challenges in matching assets with evolving member profiles or market conditions."

"To address this, some providers may explore using shorter-dated passive strategies, incorporating active management, hybrid approaches, or utilising overlays to achieve the desired risk profile,” concluded Randhawa.

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