Opalesque Industry Update - Overall, Cerulli Associates expects global defined contribution (DC) assets to reach US$13.7 trillion by 2016, which equates to a 7.5% compound annual growth rate (CAGR) over five years. |
Australia will retain its position as a significant market relative to the size of its population. In absolute terms it will be the third largest market after the United States and the United Kingdom in 2016. The United Kingdom is the only market with assets in excess of US$1 trillion that is expected to have double-digit growth. Asia ex-Japan shows immense potential with Korea and Taiwan registering the strongest growth rates across the region. Countries such as China, Hong Kong, and Thailand have also made their mark with growth rates expected to be more than 10%.
These are just some of the findings from Global Defined Contribution Pensions 2012: Identifying Market Opportunities, a global DC pensions report from Cerulli Associates.
Defined contribution pension plans will be the fastest-growing source of business in Europe this year, according to the report's survey of 20 international investment firms with a total of €1.7 trillion (US$2.1 trillion) in European assets under management. Germany, the United Kingdom, and the Netherlands were flagged as offering the best business opportunities; the former for its potential and the latter two markets for sheer size and sophistication. Although relatively rich countries, they have a long way to go to reach U.S. levels of penetration.
Growth can be tapped in apparently disparate markets, but there is very little synergy to harness across different countries, even when they are in the same region. Identifying the gatekeepers is the easy part; winning mandates is a more complex challenge. While it is possible to identify common themes, much also depends on the country's regulatory environment and investment heritage.
"Performance is considered an important attribute by most European trustees and consultants, but low fees act as a trump card in competitive tenders in Italy," said Barbara Wall, director at Cerulli Associates. "In Germany it is steadiness of returns and a coherent investment strategy that win. In the Netherlands and the Nordic region expertise in proven alpha niches is a competitive advantage, whereas in France it is an association with an insurance company that holds sway."
"In broad terms, fund managers are reacting in two main ways to protect investors against uncertainty," commented Yoon Ng, a Cerulli associate director. "One response is to move toward target-date funds that are geared toward retirement at a particular time in the future. This approach is well established in the United States, but it is also gaining traction in the United Kingdom and Latin America. An alternative response is to offer products with some sort of guarantee. Germany, Japan, and Italy have a strong predisposition toward guaranteed products."
Wall added, "Product mix in the DC space may be very different from that in DB but key investment themes are similar-income certainty, inflation protection, and volatility minimization. As the size of the DC asset pool grows, there will be heightened demand for foreign investment as well as specialized products."
• Pressure on fees is one trend that is close to being truly universal. Virtually all investors polled in the Nordic region, the United Kingdom, and the Netherlands told Cerulli the crisis has prompted them to negotiate fees more vigorously. These same interviewees also said they were prepared to share extra returns with managers that could deliver stable performance. Continuity in returns was the common requirement and a key to new business.
• There is great diversity in the use of consultants. In the United States they play a substantial role in larger schemes and increasingly in mid-market ones too. In the United Kingdom they are influential in decisions made by pension schemes on platform selection, manager selection, and asset allocation. Elsewhere they typically play a more limited role. It is notable that consultants were seen by a significant margin of survey respondents as being the most important channel for growing European DC business this year.