The rise of defined contribution (DC) and auto-enrolment is blurring the lines between institutional and retail investors, according to the Investment Association (IA).
Presenting its 2016 annual survey of its members, the UK’s asset management trade body said new and growing DC schemes were classified as institutional investors for the IA’s purposes but often behaved more like retail investors because individual members bore the investment risk.
Although the IA did not have specific concerns about these difficulties, Anastasia Petraki, head of research and statistics, said it was important to ensure equivalent governance standards for defined benefit (DB) and DC schemes. “We are seeing that with independent DC governance committees,” she said.
In addition, the IA’s survey showed a growing trend towards multi-asset strategies, which the association also attributed in part to DC schemes.
Ruth Meade, senior research analyst, said mixed-asset default funds in DC schemes were a likely cause of the recent increase in flows into multi-asset strategies: 21% of all mandates awarded in 2016 were multi-asset, the IA’s data showed.
There was scope for more DC-driven innovation in the post-retirement space, the IA said in its report. With individuals in the UK no longer required to buy an annuity in retirement, the association said there was “a gap in the market for products that were income-focused but offered some way of managing downside capital risk”.
The IA said: “One significant barrier to innovation at the moment is that DC decumulation is still in the very early stages. Although around half a million people reach retirement age each year, the median size of a DC pot at retirement is currently around £26,000 [€29,200], so asset managers developing specialist products for this market will need to take a long-term view and accept that it will be some years before this market is of substantial size and for many years the flows into these products may be minimal.”
Despite the influence of DC, DB funds remained the most significant institutional segment. The IA reported £1.8trn in workplace DB assets, compared to £410bn in DC.
Elsewhere in the survey, the IA reported that assets in specialist environmental, social and governance (ESG) funds grew but remained steady as an overall proportion of industry assets (1.2%). However, Petraki explained that the IA’s methodology did not take into account asset managers’ membership of the UK’s Stewardship Code or other ESG-related bodies.