Increased Consolidation and Competition are Reshaping Europe’s Pension Markets

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Increased Consolidation and Competition are Reshaping Europe’s Pension Markets

 

Larger pension schemes want to build close relationships with just a few asset manager partners, so firms should be prepared to collaborate


September 2019, LONDON - Cerulli Associates' latest report, European Institutional Dynamics 2019: Addressable Opportunities for Asset Management, shows how consolidation within the pension industry is affecting the opportunities available to asset managers. Although consolidation may eventually lead pension schemes to bring more assets in-house, so far no trend for increased insourcing or outsourcing has emerged. Today, managers can help pensions to access niche asset classes where they do not have the expertise or resources to conduct manager search and due diligence internally.


In the Netherlands, consolidation has already led to more competition, more fee pressure, and a knock-on effect within fiduciary and asset management that has seen some smaller players forced to leave the market. A similar process is underway in Switzerland and the U.K.


“The U.K. pension industry is becoming more competitive for asset managers due to the pooling of the local government pension schemes, the rise of defined benefit aggregators and defined contribution (DC) master trusts, and the increased use of fiduciary managers,” says Justina Deveikyte, associate director on Cerulli’s European institutional research team. “However, these changes are creating opportunities. For example, fiduciary managers are more willing to invest in niche asset classes than small and mid-sized pension schemes. And in the DC space, the master trusts will be able to drive much-needed innovation, such as the ability to include a broader range of asset classes in default funds.”


Most European pension schemes are open to working with foreign managers, but prefer firms that can offer client relationship capabilities in the scheme’s home country. Smaller pension schemes tend to have more of a home bias, in part because they value being able to do business in their own language. In addition, smaller schemes appreciate local managers’ familiarity with their native legal and compliance frameworks, as well as the proximity of the asset management team.


Perhaps unsurprisingly, the clear majority of the European pension schemes Cerulli surveyed said that strong performance is a “very important” attribute when selecting a manager. However, digging deeper, more than half of respondents emphasized the importance of risk management tools, transparency, and the ability to meet reporting requirements when selecting asset managers.


Pensions are also evaluating the asset classes they invest in, looking to make changes in order to meet their obligations in the context of the ongoing low-interest-rate environment. Across Europe, 18.8% of the pension schemes that Cerulli surveyed plan to increase their investment in infrastructure debt and 7.5% intend to allocate more to investment-grade bonds. Demand differs across countries: German pension schemes are most interested in investment-grade and high-yield bonds, whereas U.K. schemes plan to invest more in infrastructure and multi-asset. In contrast, 7.5% of the European pension schemes that we surveyed reported that they plan to divest from hedge funds. This trend is mainly driven by investor sentiment in the U.K. and Switzerland. Bank loans and collateralized loan obligations have also fallen out of favor: 5.0% of respondents plan to decrease their allocation to the asset class and only 3.8% intend to invest more.


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NOTES TO EDITORS:
The Cerulli Report—European Institutional Dynamics 2019: Addressable Opportunities for Asset Management is an examination of pan-institutional clients in Europe. The report has a broad focus on European institutional end clients and a wide range of topic areas. It analyzes and discusses the latest developments in institutional investing across six key markets: the U.K., the Netherlands, Germany, France, Switzerland, and Sweden.

 

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