Pension providers should cut costs by close to a third to capitalise on opportunities in the UK’s defined contribution market, a white paper has said, but consultants questioned the potential for new market entrants.
The DC market has changed in both scope and scale in recent years. Auto-enrolment has pushed up membership levels and last year’s Budget reforms increased the options available to members at retirement.
A white paper entitled 'In the eye of the storm: transformation in the UK retirement market', released this week by management consultancy McKinsey, singled out the UK DC market as having “an opportunity for capturing market share that is unique in the broader European asset management landscape”.
It outlined a confluence of factors creating opportunities, namely changes in regulation and new technology.
It also identified areas providers could focus on to maximise their chances of success. These include introducing a range of products covering all aspects up to, and through, retirement; building direct-to-consumer channels; and reducing costs by 15-30 per cent.
Annabel Duncan, DC associate at JPMorgan Asset Management, said opportunities created by the Budget reforms would increase choice for members.
I’ve talked to a number of providers in the past year who were looking to get into DC. Most have said now they aren’t going to bother
Andy Cheseldine, LCP
“Having more options at the scheme level can only be a good thing,” she said, but added more choice could lead to greater confusion. “That’s where the traditional role of consultants will be useful.”
However, others were sceptical about the space in the UK DC market for new entrants, citing tight margins and high competition.
Andy Cheseldine, partner at consultancy LCP, said it would be difficult for new companies to enter unless they had a lot of resources and were prepared to commit for five years.
“I’ve talked to a number of providers in the past year who were looking to get into DC,” he said. “Most have said [now] they aren’t going to bother.”
Cheseldine said providers would struggle to cut costs by 15-30 per cent due to existing pressure on fees from the charge cap and competition. In order to cut costs further, he said, “it’s about admin and getting that really slick. It’s also about scale of investment operations”.
Cap constraints
Damian Stancombe, partner at consultancy Barnett Waddingham, said the charge cap was already threatening innovation in the products offered to schemes and members.
He said: “The price cap has damaged the innovation aspect – true innovation can never really happen within 75 and possibly 50 [basis points].”
Stancombe added that the number of players in the market was in fact likely to continue to decrease as larger providers acquired competitors.
“I think we’re going to go through a massive period of consolidation. We’ve already seen it in the existing provider market. I don’t see the direction of travel changing,” he said.
The white paper also predicted further consolidation. It said large providers and asset managers should "pursue [merger and acquisition opportunities] to add new capabilities… or build at-scale pension providers” that could be more efficient and use existing relationships to drive sales.
Mike Spink, DC consultant at Spence & Partners, said consolidation would ultimately improve the offering for scheme members.
He said: “I think a changing DC market must eventually translate into a higher-quality DC market – so this is all good news for workplace schemes and their members.”
He added that some innovation would take place within workplace schemes, rather than providers or asset managers.
“Hardly any trust-based DC schemes are offering in-scheme drawdown at present. We also suspect that where this can be achieved, it ought to be in certain members’ interests to avoid the generally higher costs levied in the retail space.”
