Investment outsourcers reported the first decline in assets managed worldwide for institutions with full or partial discretion since Pensions & Investments began tracking the industry in 2011.
Aggregate assets dropped 1.1% to $1.287 trillion for the year ended March 31, analysis of P&I survey data from outsourcers showed.
The recent decline is a sharp contrast to strong growth of outsourced assets managed with some level of discretion in the previous two years: Assets rose 10% to $1.3 trillion in the year ended March 31, 2015, and jumped 25.7% to $1.18 trillion as of the same date in 2014.
The pause in momentum can be attributed in part to corporate pension risk transfers that moved assets from investment outsourcing into annuities, sources said. But the same observers stressed that outsourcing is poised for huge growth worldwide, especially from corporate defined contribution plan sponsors and non-profit health-care organizations.
“We've seen a huge uptick in defined contribution plan business which is emanating from governance and strategy issues as investment committees focus more on participant outcomes,” said Rich Joseph, a Boston-based partner and head of Mercer Investment Management's U.S. delegated solutions business.
The recent surge in corporate pension risk transfers — U.S. pension buyout transactions totaled $13.599 billion in the 15 months ended March 31, according to the LIMRA Secure Retirement Institute — did affect outsourcers, including Mercer, Mr. Joseph said.
Some of the first corporate clients Mercer took on for investment outsourcing seven to 10 years ago have begun to freeze and close their defined benefit plans, a process that Mercer is also assisting, Mr. Joseph said. “There's a negative revenue angle to risk transfers, but it's something we signed on to do, to help companies manage all aspects of their plans,” he said.
Mr. Joseph declined to identify Mercer's outsourcing clients.
Even with the loss of some defined benefit plan assets, Mercer's outsourcing assets — 99% of which are managed on a fully discretionary basis — grew 11.6% to $124.8 billion in the year, pushing the firm to the top of P&I's ranking of managers based on worldwide assets under management with at least partial discretion. Mercer ranked second in the prior year ranking.