In the fifth of Newton Investment Management's DC updates, Al McMutrie of BNY Mellon says platforms are set to evolve, grow and consolidate
The fast-growing UK defined contribution (DC) market looks poised for further consolidation as providers seek to increase investor choice, improve service levels and achieve fresh economies of scale.
According to recent data from market specialist Platforum1, DC assets within the UK workplace pension sector alone grew by over 20% year on year from Q3 2015 to Q3 2016. Assets under management stood at £271.2bn at the end of that period2, bringing a major filip - but also wider challenges - to DC platform providers.
We have noted a significant increase in market growth on platforms in the DC sector over the last 18 months, as factors such as auto-enrolment, new pension ‘freedoms' and the ongoing shift by employers from defined benefit (DB) schemes/direct investment to DC, have driven fresh asset flows into the sector.
The UK already hosts the largest DC market in Europe, with the compound annual growth rate forecast to be in the region of 10% over the next three years3. The continuing transition from DB to DC and current regulatory environment can only boost the market further.
However, while investment managers and the wider DC sector welcome this potential growth in assets, many platforms have been working hard to adapt and maintain their service levels, to avoid administrative issues for clients. We have witnessed a growing market share for the largest providers, and in a market that has already seen significant consolidation, we anticipate a further concentration of platforms.
Increased competition and client demand has meant providers need to increase efficiencies, improve technology, broaden investor choice whilst addressing the demands of corporate governance all at the same time. With global markets reaching new heights and a rising demand for non-traditional assets, we are finding clients initiating conversations around new investment strategies that could be ‘platformed'. Liquidity strategies and disciplines such as liability-driven investment (LDI), absolute return and multi-asset investments are gaining prominence.
As growing asset pools migrate from DB to DC, the ability to switch between a wide range of investment options simply, efficiently and cost effectively will be of critical importance. With this in mind, we have seen underlying schemes regularly reviewing their platforms and scrutinising their provider position in the wider marketplace. In turn, we have been working closely with our investment boutique Newton, which represents a significant proportion of our platform assets, to ensure we are delivering our core strategies and potential new strategies at competitive rates.
So the future appears to suggest that the DC platform will see further evolution and growth, as the migration from DB gathers pace and investor choice becomes ever more sophisticated. In this landscape it is likely that only the strongest, most competitive and technologically proficient players will prevail.
Al McMutrie is head of partnerships, BNY Mellon Investment Management
1. Platforum. Workplace Savings Guide. Feb 2017
2. Ibid
3. McKinsey & Co. In the eye of the storm: Transformation in the UK retirement market. April 2015
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