This is a quick romp through the past ten years of DC provision in the UK which concludes with a few words on where we are today.
Looking at the 1998 Bacon and Woodrow AVC see an institutional DC world dominated by Equitable Life and the Prudential. Most occupational dc contracts were with profits AVC policies with providers judged by the returns guaranteed. I also have here a Greenwich Associates report on the future of DC from the same era which predicted that by 2010, the UK DC landscape would be dominated by the large asset managers – Mercury, Invesco, Schroders and Fidelity, insurers would be bit players.
Inspired by this vision of greatness, many fund managers became DC providers, one or two remain in the game but the majority have found the going too tough and even the two remaining asset managers in the market (Fidelity and BlackRock) look far from certain to stay.
What has gone wrong for the asset managers?
The premises of the Greenwich survey were built on US 401K experience and included a presumption that DC purchasers would buy funds much as they did in the DB world, operational issues were considered second order as were the risk and price advantages of passive managers. The active fund managers contracted with a variety of third party administrators and took their product to market via the large investment consultancies, ignoring financial advisers and their demands for commission loaded products.
Instead the large corporates who they targeted prioritised operational efficiencies, low-risk, low-price funds and recognisable retail brands – they bought the bundled services provided by the insurers.
The insurers had been given a kick up the jacksy by stakeholder pensions which required them to overhaul their processes to reduce risk and costs and embrace passive management as a means of keeping their fund offerings cheap and predictable. Prices for DC plummeted and to remain competitive, many insurers turned to loss-leading incentivisation through the payment of commissions to advisers.
Many of these insurers have also fallen by the wayside, their attempts at introducing straight through processing were often little more than lipstick on a pig, they could not afford the generous distribution allowances to advisers and their shareholders pulled the plug on their endeavours.
Today there ae only a handful of insurers still active in the corporate DC market – Standard Life, Zürich and Friends Provident,in the vanguard with Scottish Widows, Aviva and Legal and General hanging on.
The touted arrival of “new players” into the market has not happen names like Pension Store, Virgin and the unit-trust providers, predicted to be the competition to the fund managers by Greenwich, failed to materialise. DC is a game that requires deep pockets and the new kids on the clock had neither the time or the money the play the long-game.
We are left today with a handful of core DC providers, a plethora of boutique SIPP providers and a legacy of failed or failing DC providers whose offerings look increasingly vulnerable.
Into this landscape will come NEST in April 2011. With the Retail Distribution Review putting paid to the incentives that have driven the distribution of group personal pensions in the SME market, the impending introduction of auto-enrolment that pretty well does away with the need for distribution at member level , NEST looks set to cannibalise a substantial proportion of the schemes established in the last ten years.
Once the beast is full unshackled, as I expect it to be in 2017, NEST should become the default DC accumulation vehicle for all but the larger corporates prepared to run their own schemes. By then , I hope the penny may have dropped for the pensions industry and that we will turn our attention from accumulating savings to decumulating them, making the DC pots built up in the previous twenty years, provide decent retirement incomes in the subsequent thirty, forty or fifty years.
- A massive failure of nerve – the sad state of our DC pensions (henrytapper.com)
- NEST- the irrefutable case for “Scheme Pensions”. (henrytapper.com)
- A blueprint for DC pensions (henrytapper.com)
- A definitive solution to the annuity crisis. (henrytapper.com)
- DC- where it all went wrong for the fund managers! (henrytapper.com)