The defined contribution market in Europe is poised for significant growth, fueled by government reforms, growing importance of ESG for participants and increasing acceptance by stakeholders for DC to serve as a sustainable retirement solution.

Figures released in June by the European Central Bank showed defined contribution plans making up 24.7% of retirement assets, at €646 billion ($680 billion). Cerulli Associates in 2022 projected compound annual growth rate of 9.6% for defined contribution in Europe over the next five years, well above defined benefit’s 3.6% rate.

That could conservatively add up to nearly $2.5 trillion in European DC assets, said Justina Deveikyte, director of European institutional asset management at Cerulli.

The U.K. market, with more than 32% of total European DC assets as of 2022, will play a large part, with the potential to top €1 trillion by the end of 2027, according to Cerulli. “Consolidation in the U.K.’s DC space and the increasing size of schemes will create further opportunities for international asset managers in a market that is already the most addressable in the region,” it said.

Government reforms are playing a big part in the growth picture. With the Netherlands’ Future of Pensions Act coming into effect starting in 2023, it could become one of the largest DC markets in Europe with as much as 20% of retirement assets by 2030, and managers with expertise in the U.K. DC market “will have an edge in the Netherlands,” the Cerulli report said.

The new Dutch pension system will be contribution-based, rather than promising benefits. Employers and pension providers have until Jan. 1, 2027, to make the transition.

In the U.K., the defined contribution trend is moving even faster, spurred by government proposals aimed at unlocking investments in illiquid assets that could benefit its economy. Those changes include the Mansion House Compact, signed in July with the largest U.K. DC plans pledging to invest at least 5% of their default funds in unlisted equities by 2030.

Those changes “herald a period of significant change,” for DC in the U.K., said Martin Willis of Barnett Waddingham and David Whitehair with Janus Henderson Investors who are members of the Society of Pension Professionals’ DC committee. “As the industry consolidates and grows significantly, we can expect DC schemes to invest accumulation assets akin to LGPS (local government pension schemes that pool investment assets) and Australian superannuation schemes,” they said in emailed comments.

LGPS collective assets are roughly $444 billion while Australian defined contribution-style superannuation funds had $2.3 trillion in assets as of June 30.

A push in recent years for auto enrollment in the U.K. has also “significantly reshaped the DC market” by fostering development of master trusts for multiple employers that can deliver stable outcomes, said Philip Smith, DC director for TPT Retirement Solutions in London, a retirement plan provider. The fastest-growing segment of the DC market will keep expanding along with the overall consolidation trend that is expected to produce larger master trusts, he said.

Sustainability will play an increasingly larger role in defined contribution investment decisions in the U.K., driven by member preferences as well as outside pressure to assess portfolios for risk and opportunities associated with climate, biodiversity and other sustainability topics. That could also see define contribution officials wanting direct input with investment managers on proxy voting and engagement, the SPP experts said.

“ESG remains top of agenda for all our clients,” said Jesal Mistry, senior defined contribution investment director for Legal & General Investment Management in London. “Clients have moved a long way in their journey. They see risks but also opportunities. They are also seeing more focus from members, who are putting more pressure on them to make sure interests are aligned,” Mistry said.

The process for engaging with clients on sustainability goals is still a work in progress, “with a lot of moving parts,” said Valentijn van Nieuwenhuijzen, chief investment officer and global head of sustainability in public investing for Goldman Sachs Asset Management in The Hague, Netherlands. One new demand on asset managers is for more metrics and analytics showing real world impacts. “More and more clients are asking for insight into what elements in the portfolio are actually making an impact,” he said. “It’s no longer about ambitions. It’s really about the rigor of execution,” he said.

Gemma Burrows, a director and senior consultant in Willis Towers Watson’s retirement business who leads the defined contribution team in London, said that “the DC industry has taken great strides to incorporate ESG within the investment strategies used by many of the largest pension schemes, including the major master trusts.”

Expect further developments as ESG is integrated into non-equity asset classes, and as the scale of ESG funds continues to grow, she said. “We will see more schemes able to adopt a sophisticated approach to ESG at competitive costs to investors,” Burrows said.

For larger DC plans in the U.K., recent policy changes — and more expected — will mean more assets managed in house, with external managers used when dedicated expertise is needed, and a broader range of listed assets, including fixed income and systematic strategies, Willis and Whitehair said.

It also means that illiquid private market investments that can help diversify risk and promise long-term returns “will be increasingly used in default investment strategies” as master trusts grow, said TPT Retirement Solutions’ Smith. He also sees increased interest in multiemployer collective defined contribution schemes that offer the potential for longevity protection and shared risk, as well as meeting sustainability goals.

The desire for impactful investments will mean more illiquid assets, investing in U.K. startups, clean energy projects and more, which “can have real impact,” said LGIM’s Mistry. For DC plan participants, “that can mean investing in their local area, and that story becomes a lot stronger,” he said.

As more assets accumulate in defined contribution plans, there will be more solutions offered, Mistry said.

While getting clients to understand the higher fees associated with illiquid investments can be challenging, the government’s agenda “has been really helpful. We are seeing some real movement in the market toward illiquid solutions,” Mistry said. “We are on the right trajectory as an industry.”

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