Europe’s Defined Contribution Market Is Set to Keep Growing
March 3, 2022 — London
DC assets forecast to grow at nearly twice the industry average rate
Europe’s defined contribution (DC) market will continue growing, presenting further opportunities for asset managers, according to the latest issue of The Cerulli Edge―Global Edition. Cerulli Associates estimates that the European DC market will record an average annual growth rate of 6.0% over the next five years, compared to 3.6% for the rest of the pension industry over the same period.
Although DC assets under management (AUM) represent only around 17% of Europe’s total pension assets, there is increasing focus on DC pensions throughout the region. The research finds that European DC assets could reach €5 billion by 2025. By comparison, total European pension AUM is projected to reach €12 trillion at the same time.
“Our conservative projection is that European DC assets will amount to nearly €2.2 trillion (US$2.5 trillion) by 2025, with growth linked to the implementation of pension reforms in France and the Netherlands being a success,” says Justina Deveikyte, director, European institutional asset management at Cerulli.
Consolidation in the U.K.’s DC space and the increasing size of schemes will create further opportunities for international asset managers in a market that is already the most addressable in the region, according to Cerulli.
Total U.K. occupational pension fund industry assets reached almost £2.5 trillion (US$3.5 trillion) in 2020. Although private defined benefit pension funds represent the majority of assets (69%), the market structures are shifting toward DC pension funds. The U.K. accounts for more than 32% of total European DC assets. Cerulli estimates that the U.K. DC market will grow to around €850 billion by the end of 2025, with master trusts increasing their marketshare from 17% to around 40%.
In the Netherlands, the Future of Pensions Act, which is due to come into force on Jan. 1, 2023, could be instrumental in the country becoming the second-largest DC market in Europe by 2030, with around 20% of the country’s pension assets likely to be in individual DC arrangements by that date. Managers that have expertise in the U.K. DC market will have an edge in the Netherlands.
Dutch pension assets, which totalled €1.9 trillion at the end of June 2021, will have grown to around €2.4 trillion by 2025, according to Cerulli estimates. At 1% of total pension assets, the Dutch DC market is small and consists mainly of low-cost DC vehicles (premium pension institution or PPIs), which saw their assets increase to €18.8 billion in 2Q 2021, despite the coronavirus pandemic. PPIs’ allocations to equities stood at 64.7% in 2Q 2021 (an increase of 2.5% from 2020); industry-wide pension funds’ allocations to equity stood at 11.5% at the end of 2Q 2021.
- In the U.S., the growth of retail direct platforms and the engagement of self-directed end investors mean that going direct could be a viable channel for exchange-traded fund (ETF) issuers. However, there are hurdles to be cleared, including a lack of awareness of ETFs among self-directed end investors. Product placement on the largest platforms is also challenging.
- In Asia, managers are rethinking how they service institutional clients in response to the increase in requests for real-time investment updates and a growing expectation that dynamic portfolio construction and management should be standard. The outsourced chief investment officer model is an option, but a balance needs to be struck between what is kept in-house and what is outsourced.
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