U.S. and Europe: Different Retirement-Market Dynamics

U.S. and Europe: Different Retirement-Market Dynamics

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Different Dynamics Prevail in the U.S. and European Retirement Markets

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    Providing for retirement is one of the foremost goals of most investors. But longstanding cultural differences have led to varying approaches among regions. These differences, although they are narrowing in some ways, still exist today and have meaningful implications for asset managers.

    The United States. The U.S. retirement market holds considerable opportunity for asset managers. But following the crisis, only those institutions that forge the most compelling strategies and execute them crisply will prevail.

    At the end of 2009, the total retirement market accounted for about $14.8 trillion in AuM. Growth of 6 to 7 percent annually is forecast through 2014, in line with the average growth forecast for the U.S. asset-management market overall. Several factors are driving this growth.

    First, amid an extremely uncertain economic outlook and high unemployment, Americans are feeling an increased urgency to save for retirement. (Indeed, the effects of the crisis have delayed retirement for many.) And although the first wave of the baby-boom generation is now beginning to leave the workforce, only a relatively small percentage has fully crossed over from asset accumulation to asset “decumulation” mode.

    Second, workforce participation in retirement plans continues to rise, having increased from 75 percent in 2005 to 81 percent in 2009. Also, many employers that have withheld matching pension contributions will likely resume contributions, providing a needed lift. Pension Protection Act legislation is continuing to gain traction.

    The U.S. retirement market consists of three major segments. The corporate defined-contribution (DC) market, with $3.1 trillion in AuM in 2009, is forecast to grow annually at about 7 percent in the near term. The IRA market, with $4.4 trillion in AuM, is growing at about 9 percent annually, driven by a strong flow of rollovers from DC plans (due to demographic shifts). An estimated $300 billion will roll over in 2010.

    The remainder of the market, consisting of corporate defined-benefit (DB) plans and public DC plans, are less promising for asset managers, as sponsors continue to move away from or freeze DB plans and the crisis continues to strain the funding status of public DC plans.

    Winning in the U.S. retirement market will require a careful strategy. Plan sponsors have become far more price sensitive given market volatility and increasing intermediation by pension consultants. Demands for greater fee transparency are becoming more strident. Trends such as these are favoring the use of passive products—particularly in DC plans, which historically have not used them extensively. Bundle providers remain the largest portion of the DC market, but asset managers should think twice before they consider moving in that direction. Investment-only providers, with about 50 percent of DC assets, continue to gain share.

    Overall, asset managers in the U.S. retirement market should focus on the following core initiatives:

    • Reevaluate market priorities. Asset managers should shed products, segments, and markets in which they are not truly competitive. They should also review M&A opportunities in priority markets.

    • Stay close to your clients’ thinking. Despite increasing interest in retirement-income solutions, no one has yet cracked the code. Plan sponsors are still dipping their toes in the water when it comes to providing these solutions inside DC plans. Asset managers need to stay on top of this issue as it develops.

    • Focus on client retention in rollover events. Perhaps the most critical issue for asset managers in the U.S. retirement space is how to retain assets that move from a DB or DC plan to an IRA. Demographic shifts and corresponding asset flows will only raise the stakes. Asset managers must deliver a compelling, differentiated, and unique value proposition in each of the DC and rollover markets in order to stand out in a crowded field.

    • Develop a clearly defined and differentiated investment offering. This will be critical to success in winning DB mandates, attracting assets on DC platforms, and retaining and attracting IRA assets though advisors.

    • Maintain cost discipline. Many asset managers have succeeded in cutting some costs, but the postcrisis era will likely require even more discipline.

    • Rethink operating models. This will be necessary in order to better support cost reduction and client retention objectives.

    Continental Europe. The traditional reliance on state-sponsored retirement schemes in continental Europe has been softening for many years as supplementary private plans increasingly come to the fore—to the benefit of asset managers. Nonetheless, it has become apparent in recent years that existing asset-management products in Europe do not, in general, have time horizons long enough to generate the level of return that will be needed for waves of future retirees. This mismatch needs to be addressed.

    Indeed, many national retirement schemes are forecasting substantial deficits in the 2030 to 2040 time frame. Unfunded liabilities in EU member states—the difference between the projected cost of government social policies and net expected tax revenues—currently reach an average of 434 percent of GDP. And with new regulatory measures aimed at limiting risk having the potential to limit returns as well, asset managers in Europe have both a financial and a social opportunity. By creating products with long-term time horizons and educating investors about their importance, asset managers can help reduce dependence on state schemes and help investors plan for retirement more effectively. At the same time, they can enhance their own revenue streams.

    Obviously, asset managers will not be able to solve the problem of state pension deficits on their own. But they have a distinct role to play. Those that develop the skills needed to manage assets over the long term—20 to 30 years—and that formulate creative solutions and market them effectively will benefit substantially.

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