As British employers began automatically enrolling an estimated 10 million workers into defined contribution plans in early October, money managers with U.K. operations were seeing more question marks than dollar or pound signs.
Uncertainty surrounds everything from the extent to which auto enrollment will boost inflows industrywide to which managers will benefit from those flows. Some experts suggest the impact from auto enrollment won't be fully felt before 2015 and that business opportunities for all but the megasized players might be few.
Auto enrollment overall “has got to be good for the defined contribution industry” in the U.K., said Emma Douglas, partner and leader for Mercer Workplace Savings, the investment consultant's DC plan management arm. “Over time, this will be a huge asset generator for DC schemes and managers.” According to manager estimates, auto enrollment could add about £10 billion ($16.1 billion) every year to flows into DC plans in the U.K.
But experts attach many caveats and unknowns to flow estimates; for example, opt-out rates, which are hard to predict, will have a considerable impact by decreasing the number of participants. And a hunger for lower costs — about 100 basis points for investment and administration — is cutting into how big of a slice of the asset pie for which active managers will compete.
“Clearly the quantity of money will increase. But where it goes is less clear,” said Hugh Ferrand, head of institutional sales and service at Invesco Asset Management Ltd., London.
Newly created low-cost providers, such as the National Employment Savings Trust, will compete alongside three existing models of DC plans in the U.K.: contract-based, trust-based and master trust plans, each of which outsource different levels of assets to managers. Trust-based plans tend to offer more of an opportunity for consultants and active managers to win business.
Six months ago, Ms. Douglas said, she would have thought contract-based plans would be playing a bigger role than they have. Instead, “we are now seeing much more interest in the master trust concept,” she said.
And relatively new diversified growth funds are claiming about half of default fund assets, making it even harder for active equity managers to make a business in DC.