The UK government's plan to introduce collective pension funds is likely to be modestly negative for the insurance sector, Fitch Ratings says. But the scale of the impact will depend on how the plans are implemented and the level of demand.
Collective pension funds pool the assets of many thousands of employees to cut costs and spread risk. They pay pensioners directly from fund assets, rather than providing retirees with their own pension pot that they can use to buy an annuity or invest elsewhere. The funds are common in the Netherlands and Denmark, but the UK government has not revealed whether it plans to copy these existing models or what role insurance companies will be able to play.
Even if insurers are able to enter the collective pension funds market, they are likely to be in competition with other asset managers for the new business. Combined with the potential for some existing pension assets to be switched to the new scheme, this will probably weigh on assets under management in the insurance sector.
This fall in assets under management among insurers could be partially offset if the creation of a new option for pension investment attracts new money, pushing up assets across the pension sector as a whole. But any impact is likely to be small compared with the requirement to auto-enrol employees into a pension scheme, which the government is already rolling out.
The overall impact will also depend on the take-up of the new collective funds. We believe there may be limited demand because large employers already have to provide employees with a workplace pension scheme. There is also uncertainty whether the proposals will be fully implemented, given how much consultation and clarification will be needed and the limited time until the UK general election in May 2015.
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