As ageing populations and privatisation of pension schemes drive rising retirement rates and increasing asset accumulation, one question that both European and US investment managers ask us is whether the US defined contribution (DC) experience can be replicated and to what ex-tent the current US DC products and expertise can be exported to the emer-ging European retirement market.
The rapidly evolving global capital markets, an increase in competition among providers, increasing plan and employee sophistication and the im-pact of technology and information access will all drive US and European firms to pursue asset management market share throughout Europe-including DC business. But cultural differences, the presence of traditional European managers with strong relationships, the country by country structural barriers and, not least, the US approach to serving pension clients all suggest that the process will not be predictable.
The US shift to DC in the mid 1980s was driven by a combination of demographic, economic and service factors. Plans have evolved since then due to structural changes which favoured DC versus defined benefit (DB) programmes. The first phase of this evolution, driven in large part by the corporate market, was led by human re-source (HR) departments who ad-ministered DC plans, often making features such as administration, re-cord-keeping and employee education of higher priority than investment process and performance. The early providers into this market made significant investments in technology and service infrastructure, developing a significant competitive advantage.
Today, the US market is evolving to its next phase. In the past few years, there has been an evident shift of fi-nance and HR working together to improve all aspects of the plan and the services to the sponsor and participants. This has meant more focus on investment choices, as well as a strong emphasis on investment dependability and process integrity. There is also an emerging trend towards 'open architecture' or a more 'unbundled' approach to delivering on client re-quirements.
Several concurrent developments may bring US-style DC products, experience and technology to Eur-ope's door at a time when demographics and evolving pension structures will, country by country, open the market. US firms will increasingly seek to diversify their business into new distribution channels and products to create a more balanced business mix. There are also increasing opportunities for European banks and insurance companies, particularly those with significant distribution, to access US capabilities and products though ac-quisitions, alliances, joint ventures or distribution agreements.
European plan sponsors have begun to realise that investment management will not be their only need, and top-tier administrative services for the plan and employees may become 'must have' attributes for those financial service entities who wish to serve these pools of capital. It would appear that US firms have an advantage in the early stages of this contest because they have been using these service-oriented capabilities for some time now in the US. In comparison, European service providers have historically been product and sales-oriented, anchored by strong client relationships. The shift to DC schemes might necessitate a somewhat different ap-proach, since DC plans involve not only the client sponsor but also the employee, bringing into the equation reporting, education, enrolment support, technology and service aspects which go far beyond the traditional relationship. European firms will need to assess what is presently perceived to be an investment management opportunity in the broader context of providing a significant level of non-investment services and infrastructure to support DC business.
However, US firms will face a different cultural hurdle: several US firms have spent hundred of millions of dollars developing bundled DC products for the US market, and while they may prove to be at an early advantage with European sponsors who are looking for the 'full package', it is unlikely that 'one size will fit all'. US managers will likely find a broader array of client types, stages and needs than the US product typically addresses. How ad-aptable the US product will be to the European market is an open question.
Furthermore, with European institutions facing significant costs in relation to European union and the year 2000, can they truly be expected to take on the investment necessary to become fully bundled providers? It would appear that European sponsors of all stripes will be better served if the market dynamic is not an 'either/or' scenario, but if European and US providers, both in competition and alliance, offer the broadest array of bundled and unbundled DC choices from which to choose.
John F Casey is president and CEO of BARRA/RogersCasey and Jeb B Doggett is director, BARRA Strategic Consultant Group in Connecticut