Breaking into DC Pensions' Default Funds Will be Vital for European Asset Managers

Breaking into DC Pensions’ Default Funds Will be Vital for European Asset Managers
With most DC savers ending up in the default fund, managers muts find a way to access this ever-increasing pool of assets

July 2018, London. In its latest report, European Institutional Dynamics 2018: Identifying Opportunities by Channel and Market, Cerulli Associates, a global research and consulting firm, found that around 85% to 90% of defined contribution (DC) pensions’ members end up in the default fund, so most European DC assets are in this segment. Asset managers must find a way to access these assets, but to do so they will have to overcome the twin challenges of restrictive legislation and clients’ focus on fees.

The European DC market has grown continuously since 2013 and total assets under management stood at slightly more than €2 trillion (US$2.4 trillion) at the end of 2016. Cerulli expects this growth to continue and estimates that the overall European DC market will stand at €3.4 trillion by 2022. It is therefore vital for asset managers’ future growth that they find a role for themselves in this expanding sector.

The pursuit of DC assets is complicated slightly by the mix of systems in place across Europe. “Few countries in the region make a clear distinction between defined benefit (DB) and DC and many offer a hybrid system that has elements of both,” says Ilonka Oudenampsen, senior analyst on Cerulli’s European institutional research team and lead author of the report. “For instance, Switzerland has the highest portion of DC assets in Europe, but its Pensionskassen are not pure DC—the risks are borne collectively rather than individually. Similarly, Germany’s Pensionsfonds and Pensionskassen still contain a minimum guarantee from the employer.”

Pure DC pension schemes exist in the U.K., Ireland, the Netherlands, Sweden, and Italy, although Germany has recently introduced regulation that will permit the development of pure DC funds. After Switzerland, the U.K. has the highest portion of DC assets in Europe. With an estimated CAGR of 15.3% between 2016 and 2021, the U.K.’s share of DC assets is forecast to grow to 23% of all European DC assets by 2022.

In the U.K., asset managers bemoan two requirements related to default funds: the daily liquidity requirement and the legal price cap of 75 basis points (bps), which must include all fees, including those for general administration. Some believe it is almost impossible for active managers to operate in the default space with such a low fee cap and that young DC savers do not need daily liquidity. These two requirements pose significant challenges for managers wanting a share of the country’s growing DC market and many are trying to find creative solutions. One effective and popular method is offering multi-asset products, which can supplement the default fund’s passive investments while keeping the total fee under 75bps.

“Unsurprisingly, multi-asset is the most popular asset class for DC schemes across Europe,” adds Oudenampsen. “More than half of the asset managers Cerulli surveyed expect multi-asset to be in the highest demand in France and the U.K. over the coming two years.”

This and several other new findings make up Cerulli Associates’ European Institutional Dynamics 2018 report.

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