DC growth slower than predicted, says report
Worldwide growth in defined contribution (DC) pension plans has been slower than industry predictions and may continue in the same vein going forward, according to a survey by investment consultants InterSec Research.
The survey reveals that DC pension assets in 14 key countries – including France, Germany, Italy, Spain, Switzerland and the UK, experienced annual growth of 17% in the four year period to end 1999, a figure which InterSec says is significantly lower than the consensus view of industry commentators at the time.
As an overall percentage of pension assets, DC now represents 13% of the total in the countries surveyed.
InterSec says it expects growth to remain at about the same rate for the foreseeable future – predicting annual rises of around 18% for the 14 countries.
Tabitha Rendall, director of research for InterSec Research in London, comments: "Some years ago defined contribution plans were heralded as the answer to the underfunding of pension liabilities in many countries, particularly in continental Europe.
" However, governments have primarily sought to address underfunding by amending levels of benefits within existing pay-as-you-go (PAYG) systems rather than forcing through generally unpopular legislation to encourage the development of defined contribution plans."
Other key findings of the report, which was carried out by InterSec for a number of large international asset managers, include a trend within DC plans for greater exposure to equity and foreign assets.
However, the study shows that on top of the damper than expected growth in DC business, asset managers are also having to compete harder on costs, as margins tighten due to competitive pressures or capped fees.
Furthermore, the study notes that there is little homogeneity in the progress of DC worldwide with each of the countries surveyed strongly affected by local factors, whether these be legislative, union or cultural influences.
Rendall adds: " Japan and Germany, for example, were expected to be very big markets in terms of DC growth, but for the moment little has happened."
Similarly, the report points out that there is no consensus regarding the appropriate level of participant choice in investment vehicles within DC plans.
" The US may have a wide variety of investment options within DC funds, but we are not necessarily seeing this elsewhere. A number of countries stop at the level of lifestyle options," says Rendall.
Administration, InterSec adds, has been and will continue to be a key issue for the growth of DC in certain countries and the internet will also play a large part in pensions administration and sales.
As well as the selected European markets, InterSec looked at the pension industries in Australia, Argentina, Brazil, Canada, Hong Kong, Japan, Mexico and South Africa.
**Figures giving the % of total pension assets in DC plans as at the end of 1995 and 1999
Argentina 100 100
Australia 52 45
Brazil 6 10
Canada 5 4
France 12 12
Germany 0 0
Hong Kong 47 38
Italy 0 2
Japan 0 0
Mexico 19 73
South Africa 23 29
Spain 63 76
Switzerland 55 55
UK 6 13