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IPE special report May 2018

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Pensions to boost asset management – McKinsey

EUROPE – The development of the European pensions industry and shifting demographics are set to boost Europe’s institutional asset management industry, according to a new report from McKinsey & Co.

“Looking forward, demographic trends and changes in the behaviour of customers, who will increasingly complement their traditional pension schemes with personal savings, are predicted to favour the growth of asset management volumes in the long term,” the consulting firm said.

“Another shock may stem from the development of pension schemes throughout Europe, which could shift the balance of retail and institutional volumes by increasing the institutional share,” it added, though it said there was no evidence of this yet.

The firm also found that, based on a survey of market participants, asset management profits were an average of 9.6 basis points in 2002, down from 12.1 basis points in 2001. But the number of unprofitable firms fell to 12% of the total, from 20% a year earlier.

The correlation of profits to the market downturn “has proved far higher than predicted even in the most pessimistic sensitivity simulations run in the late 1990s”.

McKinsey said the fact that some asset managers, especially in the UK, had cut costs “may be a sign that the asset management industry is entering a new phase, where professionalism in managing the business is absolutely crucial”.

It noted that retail asset management was far more profitable than institutional, generating 17 basis points compared to five basis points.

And scale is important, though only up to a point, McKinsey says. “The winners are not necessarily the largest players, but those who can leverage their strengths at a scale that allows them to remain in the race with moderate costs.”

The report was optimistic about the outlook. “In spite of the steep decline in profitability, most asset managers could end up surviving the tough environment, with only a limited number being forced to exit the industry.”

McKinsey surveyed 110 participants with a combined 4.5 trillion euros under management.

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