Act fast to reap benefit of pension reform

Asset managers and insurers must act quickly to take advantage of the regulatory changes under way in the UK pensions market, according to McKinsey, the consultancy, or risk losing out in the race for assets.

New pension freedoms, including the abolition of the requirement to buy an annuity upon retirement, "are creating unprecedented opportunities for asset managers and insurers, but the window for action is limited", said Philipp Koch, leader of McKinsey's European asset management practice.

In its "Transformation of the UK Retirement Market" report published on Monday, McKinsey said asset managers and insurers must cut costs by 15 to 30 per cent to remain competitive as well as consider pursuing acquisitions to build scale.

Some incumbents have found themselves "almost paralysed" by the pension reforms while others have adopted cautious trial-and-error approaches, said Mr Koch. He believes competitive pressures will intensify, with some heavyweight global operators entering or expanding in the UK.

Vanguard, the world's second-largest asset manager, is planning to increase its presence in the UK with US-style "smart" retirement plans that automatically enrol employees.

The UK defined contribution pension market represents assets of more than £630bn, the largest DC pool in Europe. McKinsey estimates that around £155bn of assets are "in motion" annually through contributions to workplace and personal pensions and via money moving into post-retirement decumulation products. This is expected to grow to around $180bn by 2020, helped by the auto-enrolment of workers into pension schemes.

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Soo Shin-Kobberstad, a senior analyst at Moody's, the rating agency, said "even a modest shift" away from annuities would lead to a meaningful increase in assets for fund managers.

"The opportunities may be clear but capturing them is far from simple," said Mr Koch, adding that regulatory uncertainties, evolving customer preferences and changes in distribution models would make the crafting of an effective growth strategy a challenge.

McKinsey also said employee expectations of the quantity and quality of pensions advice provided by employers would increase. Mr Koch noted that ignorance about pensions was widespread. Surveys suggest that around 40 per cent of pre-retirees were unable to name their pensions provider.

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