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Defined Contribution

Defined contribution managers brace for flood of business from Europe

Firms ready for shift from DB as companies change pension gears

Brian Henderson, partner and director of consulting at Mercer LLC

Money managers are gearing up for a busy year in the defined contribution plan market, with new assets expected to come up for grabs in Europe.

Sources said they are preparing to help corporations move participants to new or existing DC plans from defined benefit funds that have grown unaffordable for the plan sponsors. In addition to bolstering their DC teams, consultants and money managers are focusing on improving their offerings by adding broader capabilities, such as financial wellness.

The reason for their interest is clear. More European corporations have decided to freeze their DB funds in recent months, including British Airways PLC and KLM Royal Dutch Airlines. The U.K. airline is moving participants from its 15.5 billion ($21.5 billion) pension plan to a new DC plan that will launch in April, while also replacing the existing defined contribution 600 million British Airways Retirement Plan. KLM last month transferred its defined benefit plan participants out of its €1.5 billion ($1.8 billion) defined benefit plan, into a new DC plan.

The U.K. and the Netherlands were highlighted by sources as particularly attractive destinations for increased DC business, with ongoing regulatory shifts set to speed up the process of moves to DC plans.

The U.K. Pensions Regulator annual data report, published Jan. 25, showed 5.4 billion was accrued in defined contribution plans last year, an increase of more than 21% from the prior year. In 2018, these assets are expected to grow even more, with a combined employer and employee contribution set to increase in April.

For some corporations, new DC plans or a transfer of participants into existing plans are the only solutions to addressing increasing regulatory burdens and deficits.

In the Netherlands, regulations mandated a consolidation of sponsor retirement assets in 2016 to make hybrid DB-DC plans that are more affordable and have scale. New reforms aim to eliminate defined benefit programs starting in 2019, boosting DC plans even more.

Similarly, in the U.K. auto-enrollment review and transaction cost regulations issued last year put pressure on plan sponsors to focus on improving the quality of their DC plans as additional contributions enter these plans this year, sources said. The U.K. auto-enrollment regulation passed in 2012 ​ stated combined mandatory contributions by employees and employers will increase in two stages. The first increase — to 5% of salary from 3% — is scheduled in April.

"The regulations ... have made plan sponsors acutely aware of increasing costs and governance overheads involved in running their company pension scheme,'' said Brian Henderson, partner and director of consulting at Mercer LLC in Edinburgh. "These employers have finally said they (have) had enough."

That, in turn, means money managers could be set to enjoy a prosperous year with more assets to play with and a larger pool of participants to serve, sources said. They added that DC providers have been preparing by adding staff across the board in business development and administration functions.

SEI Investments (SEIC) Co., for example, appointed Steve Charlton in November as managing director defined contribution Europe, Middle East and Asia. He joined from Vanguard Group Inc., where he was defined contribution proposition manager, Europe.

In addition, consultancy firm Barnett Waddingham is adding to its 35-member team with five consultants in anticipation of DC asset inflows in the coming year, said Mark Futcher, partner and head of DC and workplace wealth in London. Barnett Waddingham has more than 1 billion in assets under advisory.

Accelerating changes

In the Netherlands, a crystallization to pure DC from the existing hybrid plans is also accelerating changes to managers' businesses. In response to the new regulations requiring assets to be managed by DC plans by 2019, PGGM, the manager of the €188.5 billion Stichting Pensioenfonds Zorg en Welzijn, Zeist, launched its DC business at the start of 2018.

That new business — DC manager Volo pensioen — is targeting corporations to help in the move. Erik Goris, chairman at Volo pensioen, in Zeist, Netherlands, said he is adding five business development executives this year. Mr. Goris added additional resources will be allocated to administrative staff to help Volo clients with their governance needs."Many clients are looking to outsource DC because it is increasingly harder for them to appoint suitable boards," he said.

Alice Evans, head of commercial and client development at Willis Towers Watson's LifeSight — a multiemployer DC plan known as a master trust that operates across the European Union, said the plan has $5 billion in assets, across 100,000 participants and 250 clients.

"This has increased from around $2 billion of assets and 40,000 members in just 12 months. We expect the business to continue to grow at a rapid rate and we will be adding administration staff" in 2018, said Ms. Evans, who is based in London.

However, sources said adding new staff or capabilities are not the only way to gain new business. Newly boosted DC businesses are going up against established practices of larger DC providers such as Legal and General Investment Management or BlackRock (BLK) Inc. (BLK) And some of those with established retirement businesses have worked to redirect their business further toward DC.

Julian Lyne, chief commercial officer at Newton Investment Management Ltd. in New York, said: "As the DC market develops and grows, we are finding that the number of our people engaged in developing and supporting our DC business is expanding. This is not to say these are explicitly new hires being added, but more redirecting people to this area as DC now demands specialist coverage from institutional and intermediary teams, as well as from fund managers."

Those managers and consultants that were early to the DC party in Europe are now focusing on addressing the needs of different groups of participants in DC plans and perfecting their offerings.

Mercer in the last 12 months launched a financial wellness division, which offers transitional strategies that will offer advice at the intersection of retirement planning and overall financial wellness to plan participants.

Financial wellness has skyrocketed to the top of the agenda for DC providers around the globe as plan sponsors are using benefits to retain and attract employees. The consultant worked with University College London to develop research on behavioral finance that looks into spending habits of various cohorts of employees within organizations. Mr. Henderson said: "In some ways, we launched our offering a bit too early but it has prepared us for the momentum that we are seeing now."