Even with the projected CAGR set to halve, there will be outsourcing opportunitiesA new report from Cerulli Associates provides analysis of recent events and trends shaping over 40 asset marketplaces worldwide, and provides a single source of coverage of the global retail and institutional asset management marketplaces.
January 10, 2023, LONDON—The European pension market is set to enter a period of lower growth, with total assets under management (AUM) estimated to grow at a compound annual growth rate (CAGR) of 3.1% over the five years ending 2026 compared to 7.3% for the 2016–2021 period, according to the January 2023 issue of The Cerulli Edge—Global Edition.
“We are expecting that some European markets will stagnate or even contract,” says Justina Deveikyte, director, European Institutional Asset Management Research at Cerulli Associates.
AUM will record growth of just 0.2% for 2022, according to Cerulli’s estimate, compared to 8.0% in 2021. European pension AUM totaled €10.8 trillion (US$11.4 trillion) at the end of 2021.
Variations Between Markets
There will be variations between markets. For example, Cerulli estimates suggest that Spain’s total AUM will shrink by an average of 5.9% between 2021 and 2026. Of the larger European pension markets, Cerulli is predicting that France will have the most challenging growth environment—it is estimated that the country’s pension market will shrink at an annualized rate of 0.5% over the five-year period.
Conversely, the pension markets in the U.K., Belgium, Sweden, and Italy are projected to be among the region’s fastest growing. “We calculate that the U.K. pension market will grow by around 5.4% annually for the next five years,” says Deveikyte.
Areas Of Expected Growth
Despite the projected slowdown in growth, there will still be opportunities for external asset managers. According to the research, consolidation should allow pension funds to adopt more innovative strategies, such as green infrastructure projects, within private markets. Managers that can establish themselves as effective partners, deploying funds to these complex strategies, will be able to take advantage of the increased consolidation.
Another area of expected growth is investment in private debt; 45% of the European pension funds intend to increase their investments in this alternative asset class over the next 12 to 24 months.
“The trend toward alternative assets generally is likely to continue, albeit at a slower pace,” notes Deveikyte. “Some pension funds have paused their allocations to alternatives based on market volatility and a drop in valuations of their liquid portfolios. These developments pushed funds to the upper limits of their strategic allocations, but as the market recovers, they will likely continue to invest in alternatives.”
Environmental, social, and governance (ESG) investing also offers growth opportunities for external asset managers. However, to win pension fund business in this arena, managers must be able to establish not only their ESG product development capabilities, but also their capacity for reporting and stewardship.
Total outsourced assets in the European pension market reached €4.7 trillion at the end of 2021, according to Cerulli’s estimates, with total assets addressable to third-party asset managers growing 9%. The firm projects that assets addressable to third-party managers will rise 16% (to €5.7 trillion) by 2026.
- In the U.S., the use of exchange-traded funds and separate accounts is expected to increase, especially among the affluent and mass affluent. Advisors are also expecting the long-awaited growth in demand for alternatives to materialize, with asset managers starting to build out or acquire alternative capabilities in anticipation. Meanwhile, changes in portfolio construction methodologies bode well for the future of the model portfolio industry segment.
- In Asia, despite the macroeconomic challenges, institutional investors are still willing to make riskier investments—provided the opportunity is right. The lifting of travel restrictions in the region is creating opportunities for equity investments; in the fixed-income space, investment-grade and financial services bonds are in favor.
About Cerulli Associates
For over 30 years, Cerulli has provided global asset and wealth management firms with unmatched, actionable insights.
Headquartered in Boston with fully staffed offices in London and Singapore, Cerulli Associates is a global research and consulting firm that provides financial institutions with guidance in strategic positioning and new business development. Our analysts blend industry knowledge, original research, and data analysis to bring perspective to current market conditions and forecasts for future developments.