Pension fund administrators and money managers that own defined contribution record-keeping businesses across Europe are shedding these units to competitors better positioned to meet the needs of investors as the business model becomes more complex with thinner margins.
New regulations that took effect this year have further squeezed margins of European record keepers, including firms owned by some of Europe's largest defined benefit pension providers such as ATP and APG Asset Management. Among other things, the regulations call for providers to communicate instantly and supply more financial information to participants, which demands a greater investment in technology to support the services.
Since the start of 2018:
- ATP sold NOW: Pensions, with 1.7 million participants, to consultant and risk management firm Cardano Group.
- APG Asset Management sold Inadmin, with 175,000 participants, to RiskCo, an administrative services provider.
- BlackRock Life Ltd. in 2018 completed the sale of its DC administration business, with 350,000 participants, to DC and workplace savings provider Aegon U.K.
Under the Institutions for Occupational Retirement Provision II directive, DC plan sponsors must provide information to participants on the projected value of their accounts at retirement, showing how prospective changes to the default option would alter the participant's retirement outcome. Sources said the mandate forced record keepers with legacy DB administration platforms to invest in software to be able to offer these tools to their DC clients.
Edwin van den Oever, managing director of the DC Dutch business at Willis Towers Watson PLC's LifeSight in Rotterdam, said DC administration is much more focused on participants, so the cost of creating a user experience in a DC plan is much higher than in a DB plan. LifeSight, a pan-European multiemployer plan, has €6 billion ($6.7 billion) in assets under management across Europe.
"You cannot see administration and communication toward members as separate in a DC plan," he said.
Large Dutch DB record keepers, either existing pension funds or managers, started a DC business but found it needed a different focus and scale to make it effective fast enough, he said. "Some of them divested their DC business and chose to stay focused on the DB assets," he noted.
Sources also said the transition of more assets moving from DB to defined contribution plans in Europe has been progressing much more slowly than these DB administrators initially expected, making it challenging to become scale players. He added that some Dutch firms expected the shift to happen quite fast but "it is taking longer than expected, due to the hold off of reforms in the Dutch pension system."
Announced in 2017, the Dutch reforms aim to move retirement assets to pure defined contribution plans from collective defined benefit arrangements.
In the U.K., the need for scale has led to more mergers in the past two years. New entrants to the U.K. DC record-keeping market are evaluating how to proceed in a market showing signs of consolidation.
Ronnie Taylor, chief distribution officer at Aegon U.K. in London, said: "Workplace savings record keeping is an extremely low-margin business," adding the U.K. record keepers need to administer at least between £30 billion ($38.7 billion) and £40 billion and charge in the region of 30 basis points to be profitable. "£50 billion would mean you are well-established," Mr. Taylor said.
Aegon acquired BlackRock Inc.'s U.K. record-keeping unit in 2018, boosting its workplace savings business by £12 billion and total business to £170 billion in assets under administration.
Kerrin Rosenberg, U.K. CEO of Cardano Group, which acquired ATP's U.K. business, NOW: Pensions, London, on Feb. 13, said in an emailed comment: "NOW: Pensions is one of the largest master trusts in a sector that is expected to go through a period of consolidation. NOW has built an infrastructure that is today sound and robust, both through internal investment and relationships with third parties. This infrastructure can be the platform for wider defined contribution services over time.
"For several years, we have been working on how we could enter the defined contribution market, which is where most new saving is happening," Mr. Rosenberg added. "We considered many options, including whether we should launch our own master trust, as many of our competitors have done."
NOW has nearly £1 billion in assets. Cardano did not administer DC assets prior to the acquisition.
Scale and infrastructure are necessary for record keepers to maintain profitability in Europe, but sources said participant communication is becoming strategically important. The latest iteration of the key directive governing occupational DC plans in Europe, IORP II, stipulates DC plan providers need to communicate minimum information to plan participants to help them make retirement decisions.
Sources said employers expect communication tools supplied by record keepers to help employees add voluntary contributions or change investment options in real time via online portals. In the past, providers typically mailede statements to a participant and those that did have an online portal weren't quick about providing information, sources said.