Firms join with banks, insurers to gain access to booming DC market
Money managers are intensifying the search for defined contribution assets in Europe by focusing on retail distribution channels, as consolidation of institutional DC plans takes a toll on other parts of their fund management business.
And DC money managers said they are finding more sources of retirement assets by partnering with distributors such as insurance companies and retail banks. These partnerships help managers to avoid burdensome administrative processes associated with setting up country-specific arrangements, sources said, and facilitate communication in participants' local languages.
Some managers have set up cross-border plans, which can operate out of one, more business-friendly country such as Belgium and accumulate assets in country-specific compartments for other, more burdensome markets. But the success of the earlier effort to gather new assets has been slow.
Instead, in a consolidating DC market, managers see retail distributors as a way to capture the emerging retirement assets from savers opting for self-select options, expatriates and higher earners.
"People have become more comfortable with technology. Because of the digital intervention people are more prepared to interact and transact. And they want to participate in that trend," said Brian Henderson, partner, director of DC consulting at Mercer LLC in Edinburgh.
Cerulli Associates estimates €3.4 billion ($3.9 billion) worth of self-managed, individually directed assets will be saved into DC arrangements by 2022, growing 41% from €2.4 billion in 2018. These assets across Europe also will grow at a faster pace annually — 8.7% by 2021 compared to the 7.8% annual growth recorded between 2011 and 2016, according to the analytics and consulting firm.
"In Europe, we are focusing on intermediaries, wholesale distribution big banks and networks where we have good feedback on our products," said Thomas Merz, head of European distribution, ex-U.K., at Vanguard Group in Zurich. The "self-selectors," wealth managers and sometimes insurance companies are the key sources of savers for the business, he added.
But Mr. Merz thinks savings opportunities need to be accessed market by market rather than through cross-border initiatives. "We are not there yet; we are far from it. It will take a couple of years," Mr. Merz said of cross-border efforts such as pan-European personal plans.
Adam Laird, head of exchange-traded funds strategy, Northern Europe at Lyxor Asset Management in London, said defined contribution has "always been a tricky market to get into. But the consolidation in Europe made it harder to get to the larger institutional DC plans."
"Self-select investments (through) independent financial advisers have become a real opportunity. I think for a very long time, there was an expectation (about) the one-size-fits-all model. But we are seeing that individualization is required," Mr. Laird said.
Lyxor's DC business is 15% to 20% of its total business and is growing, Mr. Laird said. Lyxor accesses defined contribution assets through private banks.
In Sweden, BlackRock distributes its target-date funds via Lansforsakringar Bank AB. Mikael Bolander, analyst-manager selection at Lansforsakringar Fondforvaltning, the fund management side of the bank in Stockholm, said there are a few regulatory barriers for managers to overcome in order to enter the Nordic market on their own.
"It's much easier for the manager to establish oneself (through a partnership)," Mr. Bolander said.
Managers said that through retail channels, they are capturing the attention of savers more easily by offering more personalized plans. And assets available via these channels are set to increase as regulations across Europe evolve alongside the needs of plan participants.
Since earlier this year, LF has been marketing BlackRock (BLK)'s target-date funds to Swedish parents, who can save on behalf of their children. LF recycled BlackRock's 2015-2060 target-date fund so parents, under the personal savings component of the state pension program, could boost their children's savings from a young age, Mr. Bolander said.
Also this year in Switzerland, a new regulation, Section 1e, for the first time allows plan participants to opt out of a corporate mandatory default plan if they earn an annual salary above a certain threshold. Mr. Merz thinks voluntary plans for higher earners are another market opening for money managers. "In Europe, more generally, we will see demand for something like target-date funds. And we will see demand for solutions aimed at end investors," Mr. Merz said.
Lyxor's Mr. Laird added: "In London, we are seeing demand (for personalized plans) from (expatriate) Europeans, who are looking to retire outside of the U.K." These savers want to build cash pots in euros for when they return to their home country to retire, Mr. Laird said.
While partnerships between managers and retail distributors existed in the past, consolidation in European DC markets has pushed managers to consider other ways of selling DC products. Managers might also find retail channels a good option as the growth of European cross-border multiemployer plans has not significantly increased since the implementation in 2003 of the Institutions for Occupational Retirement Provision Directive I. According to the European Insurance and Occupational Pensions Authority's latest report, there are 83 plans that fall under IORP. However, 50% of these cross-border plans are located between Ireland and the U.K. and existed before the directive.
And further consolidation is in the cards, as U.K. multiemployer plans, known as master trusts, are expected to decrease by a third following the launch of U.K. regulation designed to weed out poorly governed master trusts earlier this year.
Similarly, the 2016 Dutch Pensions Act has compelled collective defined contribution plans in the Netherlands to consolidate into six vehicles.
The brand new DC markets such as Ireland and Poland are presenting challenges in terms of access for managers, as new regulations are putting caps on charges and the number of managers that will be allowed into a market. This has prompted money managers to enter into partnerships with financial technology firms to tap the individual savers' markets.
Dan McLaughlin, director of international at Smart Pension in London, a financial technology firm that has Legal and General Investment Management as a minority shareholder, said the firm is looking beyond the U.K. into countries like Ireland and Poland where he thinks technology could help participants keep the costs low and in line with the regulation.
And this month, Smart Pension teamed up with New Ireland Assurance to deliver a pensions technology platform.n