The growth rate of target-date funds is accelerating in Europe as the budding regulatory and investment agendas of European governments continue to push plan sponsors toward more adequate defined contribution plan designs.
In the U.K. — one of the more mature and competitive European defined contribution markets, according to estimates by DC consultancy Spence Johnson, a Broadridge company — target-date funds could hold some 25% of all U.K. defined contribution assets by 2026. That's up from 2%, or £6.8 billion, in 2016. The U.K.'s defined contribution market is projected to be £871 billion in 2026, up from £338 billion in 2016.
This dramatic shift in market structure is anticipated because target-date funds can help plan sponsors manage an influx of regulatory demands, in addition to offering benefits such as simpler participant communication or access to new asset classes, sources said.
Plan executives prefer target-date funds because they offer operational efficiency and regulatory risk management, and are being treated as custodians of assets rather than investment options.
In the aftermath of the U.K.'s pension freedoms regulation in 2015 — which effectively removed the requirement to purchase an annuity to provide income in retirement — the management of volatility at different stages of the retirement investing glidepath has become a key consideration for plan executives, leaving target-date fund providers in a sweet spot.
An additional opportunity is emerging, sources said, since transaction cost disclosure is now required under a Financial Conduct Authority regulation adopted late last year. Managing and switching assets in lifestyle strategies is more costly than in target-date funds, due to consultant and administrative charges, giving plan sponsors another reason to turn to target-date funds when they begin reporting transaction costs in April.
That's what happened after the pension freedoms enactment, sources said; target-date funds became a useful tool in managing retirement outcomes once buying an annuity no longer was required. As plan participants increasingly began to opt for cash, plan sponsors moved to help them manage those retirement pots.
One such sponsor is the Pensions Trust, London. Anthony Charlwood, investment manager, said the trust's £1.07 billion ($1.5 billion) defined contribution plan added target-date funds after the pension freedoms to help participants. "Over a year ago we adjusted the glidepath for participants who were approaching retirement date and were predominantly taking their pots as cash. We are (now) invested mainly in very short-term bonds. But we have retained a 20% exposure to passive equity," Mr. Charlwood said.