Just when all the attention was focused on policies emanating from the party manifesto launches, Mercer has come along to throw a grenade into the DC pensions landscape by acquiring Netherlands-based pension manager Cardano, which owns the UK’s third largest master trust, NOW Pensions
For most of the last decade, the consultant-led master trusts – focused on the very largest corporate clients – seem to have operated in a pensions market poles apart from the ‘mass market’ of small- and medium-sized employers served by the standalone AE master trusts such as NEST, NOW and The People’s Pension.
While the immediate attraction for Mercer in making this acquisition may have been acquiring Cardano’s fiduciary management and LDI capabilities. NOW Pensions and the DC market is where much of the future growth lies, and Mercer now have the opportunity create a truly end-to-end market offering in the DC space.
Mercer has come along to throw a grenade into the DC pensions landscape
Combining Mercer’s traditional focus on some of the largest corporate DC schemes in the market with NOW Pensions significant share of the core AE market of smaller employers creates an offering that rivals those of the large-life companies such as Aviva and L&G. It also acts as a significant differentiator for Mercer from the offerings of its rivals in the consultant-led master-trust market.
Mercer’s intention to keep the NOW Pensions brand separated from its own master trust offering for now is interesting on a number of levels.
Firstly, it suggests they are planning to approach this market with a menu of options, potentially using NOW as the pension offering alongside the range of other business services they broker for small- and medium-sized businesses. This would leave their own master trust to focus its efforts on serving the more demanding large/multinational corporate client base.
Secondly, it shows a degree of caution. Margins in the space remain tight and, especially for those operating primarily in the auto-enrolment (AE) space, the path to long-term profitability remains a rocky one.
Pensions administration remains one of the main cost centres, and leaving NOW separate allows Mercer the flexibility of retaining control of the master trust’s fiduciary management but spinning off the pension admin to Aptia if it is deemed a non-core service in the future.
Both NOW and Mercer come with well-documented challenges in administration
Despite the potential upsides, however, this deal is not without its challenges. Both NOW and Mercer come with well-documented challenges in administration. Mercer, fresh from divesting itself of its troubled administration platform, have now acquired a scheme part way through a complex re-platforming of its own.
An argument can be made that Mercer are going into this with their eyes wide open. But some might point out that the definition of madness is doing the same thing over and over again and expecting a different result.
In addition, in comparison to their AE master-trust peers, NOW have struggled with performance over the past couple of years, especially during the market turmoil at the end of 2022.
While the current plan appears to be to leave the Cardano investment-management team in place, Mercer have long run an AE investment service of their own that could easily replace the NOW offering and potentially enhance the returns available from the overarching deal.
With Value for Money regulations looming – bringing with them a much stronger focus on the investment performance delivered to members – stabilising NOW’s returns are a key priority. It remains to be seen how effectively Mercer’s expertise can help achieve this, but we expect it to be an area of considerable focus going forward.
With Labour promising a pension-landscape review, Mercer are now positioned as a leading voice
Ultimately, whichever way you look at it, Mercer have dramatically increased their strategic options in a fast-evolving DC space with this acquisition. They have potentially stolen a march on their employee benefits and consulting peers, and become one of the leading end-to-end providers in the market.
It has also earned them a top-table seat in the discussion about what next for UK pensions. With Labour promising a pension-landscape review should they win the election, Mercer are now positioned as a leading voice in shaping the future direction of the AE project and DC pensions as a whole.
Robert Holford is head of research & regulation at Altus Consulting
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