Asset managers are “extraordinarily reluctant” to seize the business opportunities presented by a growing defined contribution (DC) pension fund market in the UK, according to Magnus Spence, a consultant with market intelligence firm, Spence Johnson.
He said: “The asset managers I have talked to regard the DC market as a horrible low-margin waste of time and prefer to put all their efforts into winning mandates from defined benefit (DB) pension schemes. I think this is incredibly shortsighted.”
Mr Spence was commenting on a recent study of the DC market in the US, undertaken by his firm, which spells out the lessons that asset managers can learn from the American experience.
While the DC market is in its infancy in the UK – estimates of its size range from £70bn (€80.8bn) to £550bn – the report predicts it will be twice the size of the DB pension fund market in 20 years time. Few asset managers, says Mr Spence, have the resources or skills to offer a full DC service, comprising investment-plus plan administration. Therefore, DC ‘investment only’ or the provision of third-party funds – which accounts for half the DC market in the US – is hailed as the “obvious” route in.
A key lesson for asset managers eyeing the DC market in the UK is that so-called lifecycle or target date funds (not to be confused with lifestyle funds) are now offered by over two-thirds of DC plans in the US, where they capture 20 per cent of all contributions.
The report entitled Entering the DCIO market forecasts that target date funds will be offered in at least half of UK DC schemes within five years and will emerge as the primary choice for default funds.
Consequently, asset managers are advised to make target date funds a “vital component” of their DC fund offerings.
Although the report warns that target date funds will be dominated by a few players at first, it predicts the emergence of multimanager offerings, which will fuel opportunities for third-party suppliers.
Passive management is forecast to continue to account for as much as 50 per cent of assets under management in large UK DC schemes, thereby limiting opportunities for active managers.
Mr Spence said: “The argument I have heard is that the growth of passive management has reached a plateau, and that maybe active is staging a comeback, or that it will prevent any further growth of passive in proportionate terms.
“Perhaps if a multi-asset class offering for target dating emerges, active management will start to reassert itself.”
