Consolidation within the UK defined contribution (DC) pension fund market is set to accelerate as the number of occupational DC trust schemes – including hybrids – stood at 1,740 in 2020, a 62% decline from 2010, according to data from The Pensions Regulator (TPR).

Cerulli Associates’ recent research – through its report European Retirement Industry 2021: Reassessing Opportunities Across Multiple Asset Pools – validates this, disclosing that the number of schemes with 12 to 99 participants has declined the most, falling 74% over the past decade.

The Occupational Pension Schemes (Amendment) Regulations 2021, enacted on 1 October, 2021, are set to speed up the pace of consolidation, the consultancy said, adding that the new regulations require trustees of schemes with less than £100m (€118m) in assets to justify their schemes’ existence through a value for member assessment.

Cerulli said that rapid consolidation will result in a fundamental shift in the DC landscape with fewer than 500 schemes to remain in the U.K. market by 2030.

Justina Deveikyte, director in Cerulli’s European institutional research team and lead author of the report, said: “The consolidation of smaller DC pensions into fewer, better-run schemes will not only help to improve outcomes for members, but will also steer capital toward innovative strategies, including illiquid investments, to help Britain recover from the impact of the coronavirus pandemic.”

The report concluded that master trusts will become the dominant channel in the UK’s DC market, holding 40% of total DC assets by 2025 and overtaking trust-based and contract-based schemes’ assets under management by 2030.

Consolidation will be the major factor in the growth of master trusts, it said, and the growing speed of consolidation in the U.K. market will result in fundamental change.

Justina Deveikyte at Cerulli

Justina Deveikyte

The research showed that around 32% of the UK trust-based DC pension schemes plan to move to master trust arrangements in the next 12 months.

Cerulli expects the majority of master trusts to grow their businesses organically through contribution growth or as trust-based and contract-based schemes transfer their assets. However, master trusts will be monitoring their capacity to onboard new pension schemes, especially larger schemes that require more bespoke services.

The report also showed that of the 38 master trusts currently authorized in the UK, only 15 to 20 scalable ones are expected to remain in five years’ time.

Asset managers

European pension assets reached €10trn in 2020 and Cerulli forecasts suggest they will grow to around €12trn by 2025.

While the market is growing, managers are facing an increasingly competitive environment with more consolidation across pension funds – specifically in the UK – and fee pressure. The increasing consolidation in the DC market means asset managers will need to review their distribution and marketing approaches. The Cerulli research disclosed that 80% of the managers the firm surveyed rely on existing client relationships, but that will not be sufficient as the speed of consolidation increases.

“Managers should consider developing strategic partnerships—not only with pension schemes directly, but also with platforms and wealth managers, given the evolution in the at-retirement industry,” Deveikyte said.

Private investments

The report, which examined the Europe retirement landscape, growth projections, and managers’ sales and distribution strategies for addressing pensions’ needs, looked into key trends and challenges in the retirement space and how asset managers can succeed.

It showed that 85% of pension funds polled plan to fully outsource private equity buyout strategies to external managers over the next 12 months.

However, around 37% of pension funds anticipate leveraging their existing asset manager relationships instead of appointing new assets managers.

“Managers seeking mandate wins will find success by offering illiquid assets and providing exposure to private investments, according to our latest research,” Deveikyte said.

European pensions have shown increasing demand for private investments in recent years, but not all have invested significantly, she added.

“Nearly half of the Dutch, French, and German pensions expect to increase their allocations to private equity growth strategies and a similar proportion of them will be looking to increase their exposure to real estate equity over the next 12 months,” she said.

Cerulli’s report is available here.

To read the digital edition of IPE’s latest magazine click here.