The U.K. Defined Contribution Market is Poised for Rapid Consolidation
November 24, 2021 — London
Consolidation will improve outcomes for members and steer capital toward innovative strategies
Consolidation is underway in the U.K. defined contribution (DC) market. The number of DC trust-based schemes (excluding micro-schemes) in the market stands at 1,560, a 66% decline from 2009, according to data from The Pensions Regulator. The number of schemes with 12 to 99 participants has declined the most, falling 74% over the past decade, according to Cerulli Associates’ latest report, European Retirement Industry 2021: Reassessing Opportunities Across Multiple Asset Pools.
The Occupational Pension Schemes (Amendment) Regulations 2021, enacted on October 1, 2021, are set to accelerate the pace of consolidation. The new regulations require trustees of schemes with less than £100 million (US$119 million) in assets to justify their schemes’ existence through a value for member assessment. Cerulli believes that rapid consolidation will result in a fundamental shift in the DC landscape with fewer than 500 schemes to remain in the U.K. market by 2030.
“The consolidation of smaller DC pensions into fewer, better-run schemes will not only help to improve outcomes for members, but will also steer capital toward innovative strategies, including illiquid investments, to help Britain recover from the impact of the coronavirus pandemic,” says Justina Deveikyte, director in Cerulli’s European institutional research team and lead author of the report.
Master trusts will become the dominant channel in the U.K.’s DC market, holding 40% of total DC assets by 2025 and overtaking trust-based and contract-based schemes’ assets under management (AUM) by 2030. Consolidation will be the major factor in the growth of master trusts and the growing speed of consolidation in the U.K. market will result in fundamental change. Around 32% of the U.K. trust-based DC pension schemes indicate they plan to move to master trust arrangements in the next 12 months.
The majority of master trusts expect to grow their businesses organically though contribution growth or as trust-based and contract-based schemes transfer their assets. However, master trusts will be monitoring their capacity to onboard new pension schemes, especially larger schemes that require more bespoke services. Those that are more accommodating and flexible will grow the most. In addition, of the 38 master trusts currently authorized in the U.K., Cerulli expects 15 to 20 scalable ones to remain in five years’ time.
The increasing consolidation in the DC market means asset managers will need to review their distribution and marketing approaches. Most (80%) of the managers Cerulli surveyed rely on existing client relationships, but that will not be sufficient as the speed of consolidation increases. “Managers should consider developing strategic partnerships—not only with pension schemes directly, but also with platforms and wealth managers, given the evolution in the at-retirement industry,” adds Deveikyte.
Environmental, social, and governance (ESG) continues to attract attention across all scheme types. Most of the DC schemes integrate ESG into less than 30% of their default portfolio. Only 5% of respondents said that more than 50% of their default portfolio assets apply ESG tilts and screens. Soon a majority of master trusts will have 100% of their default investment strategies in ESG funds and ESG will be seen as a hygiene factor rather than an add-on. At that point, the level of impact ESG strategies make will matter the most.
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