A call by the European Commission to introduce a defined contribution standard for the European Union similar to 401(k) plans is likely to face a long uphill battle.
Such a battle could hamper money managers' efforts to expand in Europe's fast-growing DC market.
The defined contribution industry in Europe grew 45% to e1.47 trillion ($1.95 trillion) in the five years ended Dec. 31, according to a report published by Cerulli Associates in July. And Cerulli estimates it will increase about 70% — to e2.5 trillion — in the next five years, said Shiv Taneja, managing director and head of Cerulli's international research practice.
“We don't expect exponential growth that's projected in a straight line,” Mr. Taneja added. “We think it will be at a more erratic pace that's slow in the next couple of years (as governments take time to implement pension reforms) and then rising more rapidly.”
The corporate DC market “sits on the threshold of substantial growth” because of a continued shift from defined benefit plans, according to the report.
Also, Europe's recent sovereign debt crisis has served as a further wake-up call for governments to reduce state pension obligations, eventually resulting in reforms that require or encourage DC-type savings, sources said.
In the U.K, for example, the government-backed National Employment Savings Trust scheduled to be launched in 2012 is expected to gather as much as £200 billion ($320 billion) in DC assets by 2040.
“We're still in the early stages” of DC development in Europe, said Andrew Warwick-Thompson, London-based principal and strategy leader in the benefits practice at Hewitt Associates Inc.
“Although a legal framework (known as the Institutions for Occupational Retirement Provision Directive) has been established, the difficulty is coming up with some kind of a pan-European unified approach to DC investment and a common benefit structure.”
Considerable barriers to cross-border DC activity “prevent the full realization of efficiency gains arising from (economies of scale) and competition, thereby raising the cost of pensions and restricting consumer choice,” according to a discussion paper published by the European Commission in July.
“The fragmented and incomplete character of the present European (IORP) framework may no longer be sufficient,” according to the paper.
Ashish Kapur, U.K. defined contribution specialist at SEI Investments Co. in London, said efforts by the European Commission to harmonize DC standards will prove difficult to achieve in the short to medium term. “There's no point in bringing pension laws in line (among different member states) when you still have different tax laws, different retirement ages and so on,” Mr. Kapur said.
For example, U.K. DC participants generally are allowed many different investment options compared with such countries as Switzerland and Germany. In those countries, the role of asset protection or guarantees play a bigger role, said Alexander Boersch, senior pension analyst at Allianz Global Investors AG, Munich.
“DC plans in Europe are so different from each other that it's really hard to have one standard for all the different countries,” Mr. Boersch said. “So managers usually have to adjust investment strategies to plan designs for each country.”