Legal & General Property has become the latest firm to highlight the growing importance of Defined Contribution pension schemes as a source of equity for property funds.
The property arm of the UK insurer said that for the first time ever, net inflows into its balanced property funds in a single quarter from defined contribution clients surpassed inflows from defined benefit pension funds. It said corporate DC pension schemes poured in a net £36 million (€42 million; $56 million) as opposed to £17 million from DB plans in the third quarter of this year.
Pete Gladwell, business development manager at L&G, said: “Whether this figure represents an inflexion point or is simply indicative of a growing trend, we see no let up in the growing demand from defined contributions clients, supported by increasing research evidence and recommendations from the leading investment consultants.”
The figure from L&G underlines a global trend in the pension fund industry that is seeing a move by corporations away from DB to DC plans.
DB plans are pension plans which promise a specified monthly payment predetermined by a formula based on earnings history, length of service and age, but not by investment returns. A DC plan, however, is one in which the employer guarantees a certain contribution, but the payout depends on investment performance. Corporates are less inclined to start DB pension plans due to the fact that people are living longer and that poor investment returns have left some corporations with a huge financial black hole.
L&G said that it launched just six months ago a fund for UK DC pension schemes called the Hybrid Property Fund. It also highlighted research by consultant Towers Watson that said DC schemes’ share of UK pension fund capital rose from 3 percent in 2000 to 40 percent in 2010. Furthermore, 88 percent of pension schemes offered to new employees are DC rather than DB. Yet, said L&G, the response to this “emerging trend” had been “lacklustre”.
However, several high profile industry figures in private equity real estate have drawn attention to the rise of DC schemes. In September, at the PERE Global Investor Forum in Amsterdam, Nori Gerardo Lietz, founder of Areté Capital, predicted a profound effect on the industry. “DB pensions are going to have to say over the next five years that they really cannot make any more private equity or private equity real estate investments,” she said. At the same time, the shift to DC schemes would end in a “massive consolidation of power” within the consultant community because they are going to be the beneficiaries of outsourced management, she explained.
Kurt Roeloffs, global chief investment officer at RREEF, said no one had yet conquered how to take a higher-risk strategy such as private equity real estate and apply it to DC schemes. “That is going to be a very big prize as those funds get scaled up in size and they do more real estate investment.”
McKinsey & Company, the consultancy firm, said in a recent research paper that the size of the global DC market was likely to double by 2015 to between $7.5 trillion and $8.5 trillion in assets under management. More strikingly still, it said DC funds would become three times larger than the market for DB plans. “Plan providers, asset managers and financial advisors/wealth managers, among others, will enjoy access to a revenue pool projected at $20 billion to $25 billion for the mega 401(k) plan (DC fund) segment alone,” it said.