A market report has predicted defined contribution pensions will triple in size to £787bn within the next decade with TDFs leading the way, but its bullish growth predictions have been questioned.
The sector has grown since the introduction of auto-enrolment in 2012 as a large part of the workforce population has been marched into DC schemes. This has been fuelled further by the decline in defined benefit schemes.
The prediction formed part of research provider Spence Johnson’s 'UK Defined Contribution Market Intelligence Report 2014', released earlier this month. It predicted an average annual growth of around 11 per cent.
The report said: “While member growth will be the dominant driver of growth in the near term, factors such as the auto-escalation of contributions in late 2016 and 2017… will also play their role."
Robert Holford, senior consultant at Spence Johnson, said market growth had been opaque in earlier years, but DC assets were thought to be relatively flat from 2007 to 2012 before growing steadily.
He said: “[This] has been driven by the move towards auto-enrolment, though that has been fed by the decline of DB. Auto-enrolment is growing the [number of] members very fast."
But Stephen Budge, head of DC investment at consultancy KPMG, said auto-enrolment was not yet driving much growth in DC assets.
Further predictions
Mastertrusts currently have 27% of the 13.4m DC members, of whom 40% are in Nest.
The report predicted: "Our analysis shows that the growth of solutions products such as target date and defined ambition will significantly compress the market share of active single-asset fund components (such as active UK equity funds or active global equity funds) within DC default funds."
Spence Johnson believes some 93% of schemes and 80% of assets will be bundled by 2024.
“The auto-enrolment piece is a major push, but it’s not driving assets at the moment because of the low levels of contribution,” he said. “I think the assets are still being driven through the existing scheme structures.”
The report predicted an upswing in the popularity of TDFs, which form a key part of mastertrust Nest’s investment strategy.
These will grow to 21 per cent of default fund assets by 2024, it forecasted, up from 1 per cent currently.
“Although we have not seen significant asset growth over the past year, we have had a number of indications that acceptance of target date solutions is growing, especially among larger schemes,” the report said.
It estimated the TDF market would reach £143bn in 2024, of which £71bn would be in mastertrusts.
But Budge said: “I’m not sure I agree that there will be that level of take-up. They definitely have their place. If you want to set up a target date fund structure you have to have a fair amount of assets for the customisation… you might want.”
Nest, for example, which has seen stellar growth as the state-sponsored pension scheme, has the customisation to design its TDF structure to suit its member cohorts.
