GLOBAL – Defined contribution (DC) will be the fastest-growing source of pensions business in Europe this year, with Germany, the Netherlands and the UK offering the best “opportunities”, according to a new survey.
The survey – entitled ‘Global Defined Contribution Pensions 2012: Identifying Market Opportunities’ and conducted by Cerulli Associates – found that global DC assets were set to reach $13.7trn (€10.6trn) by 2016.
The UK, with more than $1trn in DC assets, was the only market expected to show double-digit growth.
The 20 international investment firms surveyed – which manage €1.7trn of European assets – believe Germany offers the best opportunity for potential, while the UK and the Netherlands offer the best opportunities for size and sophistication.
However, Cerulli acknowledges in its research that while those countries are seen as “relatively rich”, they still have a long way to go to reach US levels of DC penetration.
According to the research firm, 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.
It said identifying the “gatekeepers” was the easy part, but winning mandates was a more complex challenge.
Barbara Wall, director at Cerulli, said: “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.
“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.”
Against this uncertainty, fund managers are moving towards two main strategies, Cerulli said.
First, fund managers can adopt target-date funds that are geared towards retirement at a particular time in the future.
Yoon Ng, an associate director at Cerulli, added: “This approach is well established in the US, but it is also gaining traction in the UK and Latin America.”
The second option consists in offering products with some sort of guarantee, for which Germany, Japan and Italy have a strong predisposition, the report found.
“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,” Wall added.
“As the size of the DC asset pool grows, there will be heightened demand for foreign investment, as well as specialised products.”