As a global asset manager, regular collaboration with other regions enables us to gain access to unique insights that enhance our capabilities, particularly in areas like retirement. In a recent exchange with our industry partners in the United Kingdom, we took a deeper look into the nuanced market trends shaping the U.S. defined contribution market and the U.K. market to understand how we can better help savers meet their financial goals and assist employers in supporting their employees.
While there are structural differences between the U.K. and U.S. markets, interestingly, there are a number of similar trends at play. Because we are at different inflection points along the path of these trends, we can learn a lot from comparing our regional insights.
Historical and recent structural changes shaped current landscape
Structural changes are driving similar trends in both regions, but the retirement systems between the two countries are quite different. In the United States, the primary approach to retirement is workplace-based, single employer-sponsored DC plans. While defined benefit plan offerings in the private-sector workforce generally are on the decline, they are also part of the retirement landscape. Finally, individual retirement accounts represent a significant share of assets in the U.S. retirement market, with almost all of the assets in IRAs originally sourced from DC plans and rolled into IRAs.
In the U.K., the dominant structure of retirement plans today is the master trust, which is a multiple-employer plan. Private sector DB plans are largely closed to future accrual and are on a path to buy out their liabilities with an insurance company. Workplace DC is projected to dominate investible assets, forecast to reach $1.3 trillion by 2030 and to exceed DB plans during the following decade.
However, 10 years ago, the U.K. market had a similar structure to that of the U.S. today.
The U.K. introduced policy changes a decade ago that resulted in massive consolidation. The move toward pooled-employer plans was due in part to the mandate for auto enrollment. Many employers viewed this requirement as just one more cost and administrative burden as they tried to offer workplace savings benefits to employees.
The regulatory shift to the master trust began in earnest, and today, the U.K. market is largely focused on it. Approximately 20 master trust plans dominate the market, with the largest 10 managing more than 75% of total assets and representing 85% of savers. Employers embraced the pooled plan structure so operational costs and risk management could be outsourced, typically to an insurance company.
The U.S. only recently passed legislation that mandates auto enrollment — at least for new plans. Since the implementation of SECURE 2.0 last year, all newly created plans must offer auto enrollment and auto escalation (with the ability for participants to opt out). Understanding the impact of mandatory auto enrollment on the U.K. retirement industry over a decade, including participation, engagement and outcomes, can better inform both regions as they seek to collaborate on innovative solutions for plan sponsors.
The pooled-employer plan concept is an area where the U.K. is ahead of the U.S.
The U.S. passed the Setting Every Community Up for Retirement Enhancement Act of 2019 (or SECURE 1.0), which introduced pooled employer plans (or PEPs) and multiemployer plans (or MEPs). The intent of the Act was to help companies without workplace savings to be able to offer efficient, affordable plans.
Despite different regulatory timelines, similarities in trends remain
Recently, there has been a growing interest in pooled plans among employers of all sizes. Though still in its early stages in the U.S., industry leaders are tracking this trend.
In tandem, investors in both regions have shared goals and are looking for similar opportunities. Both regions report a growing interest in several investment areas including access to alternatives and income generation.
The desire to democratize private markets is a priority for both regions. Public markets continue to shrink, particularly as most retail investors are not benefiting from the same access and risk/return profile that institutional and high-net-worth investors receive. In the U.K., the government provides regulatory encouragement for master trusts to, at a minimum, consider private markets.
The same is true for income, including current distribution models and how solutions are brought to market. Interest in income-generating products within DC plans is growing. These options may include a range of strategies from stable value to money-market funds and various forms of guaranteed income investments such as annuities.
Fees, financial wellness remain front of mind
Despite the headlines around litigation over fees in the U.S., the U.K. is even more focused on fees. In fact, the industry operates under a regulatory mandate of a 75-basis-point cap on total fees (including administration). This has led many providers to operate within an investment budget of less than 35 bps. In general, the average master trust in the U.K. is operating at levels much lower than the cap, which allows space for more active management. In the U.S., the law requires full transparency. With fees less formalized, asset managers benchmark based on what their peers are paying.
It’s essential that we move the conversation in both markets away from the simplistic headline fee focus, and toward the more sophisticated concept of net-of-fee, risk-adjusted value-add. Ultimately, in our view, this is the metric that matters. Does the inclusion of these asset categories improve the risk-return outcomes for participants, net of the increased costs?
Plan sponsors in both regions are more focused on participants’ financial wellness. And workers are asking for more personalized advice and solutions. A common question emerges: How do you offer advice through the workplace using fintech? Every worker deserves sound education and guidance. How do we deliver that?
With the history and depth of the U.K. retirement market and scale of the U.S. market, there is a wealth of data and outcomes to inform strategic thinking within the retirement space across both regions. Innovation requires new perspectives. Leveraging our strategic partnerships, we aim to identify new ways to collaborate and pave the way for innovation.
Yaqub Ahmed is the co-head of retirement, insurance and college savings at Franklin Templeton and is based in St. Petersburg, Fla. Lee Hollingworth, is the head of U.K. retirement at Franklin Templeton and is based in London. This content represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.
