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UK pension shake-up squeezes fees
05 April 2013
Automatic enrolment into UK pension schemes will have profound implications for the asset management and asset servicing industries, finds Andrew Sheen
As of October 2012, the UK pensions and asset management industry has embarked on a once in a generation project that will transform the shape of the retirement landscape.
Automatic enrolment will see up to 10 million UK workers brought into saving for a pension over the next five years, compared with a total current membership of around 3.6 million. Many of these new members will be saving for the first time, or resuming saving after period of belt tightening.
For the asset management industry, it means a potential windfall as vast new asset flows are opened. Figures from the UK’s Pension Policy Institute, a think tank, suggest that by the middle of the century, total assets in defined contribution (DC) schemes could reach around £1trn, or roughly equal to the current size of the defined benefit (DB) market.
With DB schemes in terminal decline, growth for the UK asset management industry hinges on the success of automatic enrolment. Richard Skipsey, head of platform distribution at Legal & General Investment Management (LGIM) says: “I think automatic enrolment will be very good for the market – it will increase the number of investors and assets under management in the DC space, and that’s got to be seen as a positive.”
But the asset management industry also faces a dilemma. Unlike DB, which has legally required regular reviews of investment strategies and performance, many DC schemes have a set-and-forget investment strategy based on a narrow range of usually passive asset classes. For those schemes looking at new investment strategies, or looking to change their asset allocation, they are looking to a range of passive funds and bringing pressure to bear on reducing fees where possible.
While annual management charges for members are falling – under the stakeholder regime that automatic enrolment replaced, fees were capped at 1% and are gravitating to around 0.5% under automatic enrolment – this presents a new problem for asset managers. The Pensions Quality Mark (PQM), an influential kitemark for scheme quality run by the National Association of Pension Funds (NAPF), recently reduced its maximum qualifying fee from 1.00% to 0.75%.
“Pricing is being squeezed,” says Skipsey. “There is strong anecdotal evidence that there has been downward pressure on fees across the market – asset managers, administrators, advisers. All areas.”
Search for scale
To some extent, there is a land-grab underway among providers, as scheme wins over the next few years will largely dictate the shape of the UK retirement market for the foreseeable future. Many providers are deliberately competing on price to win business, leading to even greater downward pressure on fees.
From an asset retention point of view, many large providers see great embedded value in having large, household name schemes signed up, so have aggressively priced deals in order to secure business.
Skipsey says the size and number of clients signing up with large providers is “very positive” for asset managers such as LGIM and is “potentially very positive for the large players in the market, but it is not necessarily the case for more boutique managers”. He says: “It will be harder for them to gain traction, but that is not necessarily to say that they are all vying for this business.”