1、Insurance PracticeCapturing growth in the evolving UK savings and retirement marketCompanies in the UK savings and retirement market can consider targeting four high-growth segments to create a competitive advantage and to boost their resilience in challenging times.March 2023by Sid Azad,Rajiv Datta

2、ni,Jonathan Deakin,and Leda Zaharieva piranka/Getty ImagesTodays rapidly evolving macroeconomic conditions are creating considerable uncertainty for both consumers and companies participating in the UK savings and retirement market.In the near term,inflation is posing significant challenges for UK h

3、ouseholds and is likely to lead to a further reduction in the real value of total savings and the savings rate.It is not yet clear just how deep an economic downturn might be,the effect it might have on employment,the extent to which rising interest rates might offset a lower savings rate,and how cu

4、stomer needs and preferences regarding products with guarantees or downside protection will evolve.These are just some of the uncertainties that will shape consumers savings behavior and their need for financial advice and support in the years ahead.Already,companies throughout the industry are resp

5、onding with a variety of balance sheet actions and revenue and cost actions intended to protect margins and support customers through this challenging period while investing to meet consumers future needs.Managing through this volatile period will require companies to build resilience,1 maintain the

6、ir strategic courage,2 and take a through-cycle view.Those who do so will not only meet their societal obligations but also build a competitive advantage,delivering leading shareholder returns.Analysis of historical revenue growth data for more than 200 large companies around the world indicates tha

7、t a companys growth is driven largely3 by market growth in the industry segments where it competes and by the revenues it gains through mergers and acquisitions.These two elements explain almost 80 percent of the growth difference among the companies we studied;whether a company gains or loses marke

8、t sharethe third element of corporate growthexplains just 20 percent of the difference.(Capturing growth 1“Somethings coming:How US companies can build resilience,survive a downturn,and thrive in the next cycle,”McKinsey,September 16,2022.2 Michael Birshan,Ishaan Seth,and Bob Sternfels,“Strategic co

9、urage in an age of volatility,”McKinsey Quarterly,August 29,2022.3 Mehrdad Baghai,Sven Smit,and S.Patrick Viguerie,“The granularity of growth,”McKinsey Quarterly,May 1,2007.4 Ariel Babcock,Sarah Keohane Williamson,and Tim Koller,“How executives can help sustain value creation for the long term,”McKi

10、nsey,July 22,2021.by gaining market share requires a nuanced understanding of the trends and competitive dynamics at the complex intersection of products,channels,value chain segments,and consumer wealth bands.)With this analysis in mind,it behooves industry players to consider investing in the most

11、 attractive high-growth market segments.Todays period of uncertainty represents a distinct opportunity to get ahead of the curve while competitors are prioritizing short-term defensive moves over long-term growth.In this article,we examine the trends shaping the UKs savings and retirement market and

12、 their impact on companies and customers.These trends include a shift to capital-light products,rising technology-led customer engagement,and greater choice and responsibility among individual consumers for generating and managing their savings.We identify four market segments that could enable thro

13、ugh-cycle growth opportunities and the factors that might govern decisions regarding which segments to prioritize.We also explore what it will takefor example,capability shifts,cultural and organizational changes,and M&A dealmaking to help meet customers channel and product needsto successfully serv

14、e customers in prioritized segments.Three trends in the UK savings and retirement marketStrong revenue growth is well established as being critical to long-term returns.An analysis of public companies4 showed that those in the top third of their industries in revenue growth generated total returns t

15、o shareholders that exceeded those of their bottom-third peers by six to eight percentage points per yeara difference of 80 to 110 percent over a ten-year period.2Capturing growth in the evolving UK savings and retirement marketMarket segments in the UK savings and retirement market are growing at d

16、ifferent rates as structural macroeconomic,regulatory,demographic,technology,and consumer preference trends transform the supply of(and demand for)personal financial products.Three trends stand out.A shift to capital-light products.At the product level,asset flows are shifting from traditional guara

17、nteed products to capital-light products,including defined-contribution(DC)workplace pensions,that give consumers more power to manage their overall wealth.Guaranteed retirement income products have become significantly less attractive for providers and consumers alike,given historically low interes

18、t rates(despite recent rate increases)and the significant capital burden placed on the provision of policyholder guarantees because of Solvency II requirements.At the same time,an aging population with evolving protection and savings needs and the rollout of auto-enrollment pension schemes are incre

19、asing demand for accumulation and decumulation solutions.And there is a growing customer need for hybrid products that offer capital appreciation with downside protection and stable income,especially given the prolonged period of uncertainty due to the COVID-19 pandemic and ongoing macroeconomic vol

20、atility.A push for technology-led engagement.Both customers and companies are pushing for technology-led engagement in traditional adviser and workplace channels,with digital platforms and improved technology enabling lower cost propositions.A small but fast-growing digital-first and mobile channel

21、is emerging,particularly in direct-to-consumer(D2C)distribution,driven by changing customer preferences and technological developments.Creating business models built on a hybrid of human and robo-advisers is now a key agenda item for most wealth managers.So far,however,few participants in the UK mar

22、ket have made it work,and robo-advice offerings have focused more on asset allocation than on deep financial engagement that nudges customers to act.Traditionally distinct channels are converging as participants increasingly view customers lifetime financial needs holistically across multiple channe

23、ls,thus blurring the lines between workplace,D2C,and advisory channels.Meanwhile,technological developments are driving commoditization and consolidation in asset administration.A shift to the responsibility of individuals for savings.Within this increasingly complex product landscape,there has been

24、 a shift in responsibility for generating and managing retirement savings from government and defined benefit pensions to individuals.From a value chain perspective,the need for financial advice is on the rise;however,a significant“advice gap”remains,driven by a shrinking adviser base and a lack of

25、affordable advice offerings.As a result,consumers are finding a shortage of simple and affordable asset management products and advice.These trends have profoundly transformed the market dynamics within and across segments and the nature of companies relationships with their current and prospective

26、customers.In the next section,we explore the impact of these trends on four segments that offer significant growth potential,focusing on a segmental view(channel or product)because this is how participants have Creating business models built on a hybrid of human and robo-advisers is now a key agenda

27、 item for most wealth managers.3Capturing growth in the evolving UK savings and retirement markethistorically organized themselves.In the closing section,we cover the broader implications for market participants,given the growing importance of adopting a customer-focused mindset through their life c

28、ycle.Four segments offer significant growth potentialAs certain segments of the industry rise in value and potential,others are declining as the trends discussed above take hold(Exhibit 1).While overall savings and retirement assets in the UK have grown at a healthy 7 percent annually since 2015,her

29、itage life products,for example,are in runoff and closed to new business.And after UK pensions deregulation,annual sales of new retail annuities collapsed by more than 50 percent,although rising interest rates have recently resuscitated the segments growth.The 7 percent growth in defined-benefit(DB)

30、pension assets has been a function of market forces and the need for schemes to meet funding requirements.In fact,active membership in private DB schemes has fallen from about 2.1 million in 2012 to less than 1.0 million in 2021.DC membership,on the other hand,has increased from about 1.0 million pe

31、ople in 2012 to more than 26.0 million today.Looking forward,four segments in particular offer attractive growth opportunities:bulk purchase annuities(BPA),DC workplace,direct-to-consumer(D2C),and advised channels(Exhibit 2).The BPA and D2C channels have strong tailwinds supporting continued histori

32、c growth rates.DC workplace is expected to see continued growth following auto-enrollment.The increasing need for financial advice will drive attractive opportunities in advised Exhibit 1Total UK personal fnancial assets under administration by segment,trillions CAGR,201521e,%1Excludes cash,property

33、,and private-banking assets.2Bulk purchase annuities.3Direct to consumer.4Defned contribution.5Individual savings account.6Self-invested personal pension.7Defned beneft.Source:ABI;expert interviews;HMRC;Investment Association UK;McKinsey UK PFA distribution model;Platforum;ONS The UK pensions market

34、 grew by an estimated CAGR of 7 percent from 2015 to 2021.McKinsey&CompanyBPAD2COccupational DC pensionsOverallAdvised(on-platform,ISA,SIPP,drawdown)Heritage(life)AnnuitiesDB pension20152021e1.50.30.60.80.30.23.80.12.20.50.61.20.60.40.277079132275.74Capturing growth in the evolving UK savings and re

35、tirement marketchannels.And several of these segments offer the potential to grow through M&A.Bulk purchase annuities Despite the overall shift toward sales of new capital-light products,BPAs have been a major growth segment due to the large number of corporate pension schemes derisking and transfer

36、ring their liabilities to the insured market.There is approximately 1.7 trillion in DB pension scheme assets on UK companies balance sheets.The growth in BPA is likely to increase in the near term as rising rates make transactions more feasible for pension fund trustees,with their funding ratios inc

37、reasing by 12 percentage points on average in the 12 months preceding September 2022.5 Up to 300 billion of transactions is expected in the next four years,compared to approximately 125 billion in the past four years.65 WTW Global Pension Finance Watch.6 Risk transfer report 2022,Hymans-Robertson,Fe

38、bruary 17,2022;Insurance enters a new phase:A skyrocketing market,Lane Clark&Peacock(LCP),October 2022.Internal rates of return in the midteens remain attractive for BPA players today,a function of the healthy balance between the desire on the part of pension schemes to transfer risk and the limited

39、 supply of capital(including reinsurance)available to participants.However,the volume of BPA deals is projected to peak in the next three to five years.High investment returns and stable long-term cash flows have already attracted new entrants to the market,including established life insurers and pr

40、ivate capital-backed players aware of the current window of opportunity.They are setting the standard for the capabilities needed to drive returns.These capabilities include specialist investment capabilities(such as illiquid asset origination and infrastructure);increasingly sophisticated technolog

41、y and operational capabilities(including Exhibit 2Low competitive intensityHigh competitive intensityLimited growthSignifcant growthWeb Exhibit of 1Direct contribution.2Direct beneft.3Bulk purchase annuities.4Direct to consumer.5Individual savings account.6Self-invested personal pension.Source:McKin

42、sey analysisThe potential for growth in the UK pensions market varies considerably by segment.McKinsey&CompanyChannelWorkplaceD2CAdvisedOccupationalDC pensionsDB pension(including BPA)On-platform ISA,SIPP,or drawdownISA,SIPP,ordrawdownHeritage(life)AnnuitiesCore productsValue chain segmentAdvice org

43、uidancePlatform oradministrationInvestmentsolutionsAssetmanagementProjectedasset growth N/AN/ANo competition for assets;focus on operational improvementN/AN/AN/A5Capturing growth in the evolving UK savings and retirement markettechnology-enabled policy administration systems);and deep deal experienc

44、e.All companies looking to participate meaningfully must meet this capabilities bar and create value across multiple levers.7Defined-contribution workplaceDriven by the shift from DB to DC pensions and the rollout of auto-enrollment schemes,DC workplace is one of the largest asset accumulation chann

45、els today.With about 17 million active consumers in the UK market,the segment has been growing at about 8 percent annually since 2018 and is expected to continue to do so through 2025.However,revenue and operating margins for DC are lower than in other segments;average fee levels are about 50 basis

46、points,compared with 150 basis points for D2C pensions.And these margins are under constant pressure for several reasons:The market is highly commoditized,with low marginal costs.Pension trustees whose role is to constantly push for better value for members continue to put pressure on prices.And the

47、 level of competition is increasing,particularly as employee benefit consultants enter the market.The top six players now account for 80 percent of the market.Given the DC markets sheer competitive intensity,companies looking to participate in its growth will need to build scalea critical factor giv

48、en its platform-like economicsand develop deep customer relationships,which can unlock access to a greater share of a customers assets and extend the relationship into and through decumulation.Recent developments in the UK and US markets offer evidence of meaningful growth opportunities in this segm

49、ent:In one recent UK consumer survey,8 half of DC workplace customers indicated they would consider seeking financial advice from their current provider or purchasing savings or investment products.7“Running up on runoff:Strategic options for life closed books,”McKinsey,February 10,2021.8 McKinsey c

50、onsumer survey,July 2022,n=1,000.9“From saving to spending:A second front emerges in the US retirement challenge,”McKinsey,July 29,2022.Our recent US survey9 of about 9,000 households showed that providers who hold a customers primary relationship manage six times the assets of any of their other pr

51、oviders.By contrast,in the United Kingdom,the average person maintains two or more pension pots and does not hold broader savings and investments with their DC provider.By focusing on a specific growth opportunity(potential transfers of assets from DC accounts),one US asset manager has successfully

52、built a leading wealth and retirement offering,capturing 60 percent of rollovers from its DC accounts into individual products.However,developing deep customer engagement is hard,even for incumbents that benefit from scale and a large base of existing customers.And it has become more competitive as

53、new digital-first consumer-focused companies and others providing financial advice in the workplace enter the market.Regulatory change will soon lead to the arrival of a pensions dashboard,an online portal providing customers with an integrated view of all pension pots,increasing consumer awareness

54、and making consolidation of assets more likely.With the right capabilities and proposition to effectively engage consumers,those holding a customers primary wealth relationship will be well positioned to capture this growth opportunity.If they are to maintain their position,leaders in the DC workpla

55、ce segment must build distinctive capabilities in line with these new market entrants.Strong analytics will be needed to target the most promising potential customersboth those most likely to engage and those offering the highest valuecombined with targeted customer service outreach capabilities acr

56、oss channels,including call centers and web,mobile,and in-person channels.Players must be able to provide a dynamic combination of financial advice,guidance,and education,and could learn valuable lessons from 6Capturing growth in the evolving UK savings and retirement marketsuccessful companies in t

57、he United States and the United Kingdom(see sidebar,“Good advice”).They must also offer a broad range of product offerings,such as individual savings accounts,self-invested personal pensions,and brokerage accounts.Finally,a strong brand is critical to build trust among consumers.Given the DC markets

58、 high degree of consolidation and the challenges surrounding integration,the potential for growth through consolidation among the major DC pension platforms is extremely limited.At present,the most viable M&A lever for driving revenue growth involves master trusts.Single trusts will continue to be c

59、onsolidated into master trusts,and the master trust market,which has already shrunk from 82 trusts in 2017 to about 30 today,will likely consolidate further in the next two to four years.As a result,DC providers looking to capture growth through M&A will have to take advantage of this limited window

60、 of opportunity to participate in the markets consolidation.Successfully pursuing M&A in the master trust market requires strong integration capabilities,deep industry relationships,and attractive participant propositions,including a broad range of investment options,strong customer service,and expe

61、rt financial education and advice offerings.Some of these capabilities can be developed internally or acquired in the market.For example,one top-five pension provider recently acquired a financial-education business that it plans to use to drive greater customer engagement across its workplace offer

62、ings.Direct-to-consumer The dynamics of the D2C segment are complex and challenging.The market has been growing at about 13 percent annually since 2015,but it is Good adviceWorkplace pension providers have taken a variety of approaches to offering cost-effective advisory services to their customers

63、and building stronger customer relationships,often making use of technology to boost their presence and accessibility.One UK advice provider has been looking to use workplace pensions as a conversion channel for capturing broader financial assets by working directly with employers to engage employee

64、s through seminars,educational materials,and connections to advisers to build relationships and trust with consumers through workplace channels.A US workplace pension provider paid$1 billion for a robo-adviser that allowed it to expand its digital offerings in retirement pensions and create a leadin

65、g workplace wealth management franchise.Differentiating capabilities include a financial-wellness platform with tools and advice offerings,a more complete financial snapshot beyond the retirement plan(previously not possible within the workplace context),and a financial adviserfirst digital solution

66、 for high-net-worth clients(which helped reduce channel conflicts).The goal:to build long-term customer relationships,retain plan participants into retirement,and extend customer lifetime value.Another US retirement and wealth manager has successfully applied digital and analytics to revolutionize i

67、ts decumulation offering.This bespoke income product uses an algorithm-based robo-adviser to automate investment strategies and withdrawals across asset pools to meet customers financial goals,optimizing risk and tax considerations.The product is supported by a hybrid advice offering with an AI-powe

68、red mobile assistant,which provides simple servicing needs and offers access to phone-based financial advisers.In hopes of driving additional product sales and improving retention of existing customers and assets,another US retail savings company recently built a range of customer-focused financial

69、education and automated advice capabilities,including financial-planning calculators,credit improvement advice,budgeting worksheets,and spending analysis tools.Thanks to the new app-based resource,the company captured more than five million users in its first year and increased assets by more than$3

70、5 billion.7Capturing growth in the evolving UK savings and retirement markettop-heavy.Three major players have captured about 70 percent of direct platform assets.The rest of the market consists of a long tail of small,typically loss-making competitors that struggle to gain the scale required to be

71、profitable in the face of intense price pressure from the market leaders.This includes multiple new entrants in recent years,both privately funded and as part of larger savings and retirement groups,which have not yet generated stand-alone stable profits.Moreover,while the segments revenue margins a

72、re higher than in the workplace segment,margin pressure is increasing as participants compete for scale.A number of the new entrants in the market,including several large players from the United States,hope to build a competitive advantage through their lower cost base,while a new breed is emerging

73、that offers a differentiated customer proposition such as free share dealing.Given these dynamics,there are essentially three archetypes of successful participants in the D2C market:those that have or could generate the stand-alone scale to drive profitability;those that could act as an acquisition

74、channel for other areas of a business,such as advised or workplace,with no requirement to achieve the scale needed to be profitable as a stand-alone entity;and those that could act as a simple self-service offering aimed at less-wealthy customers under a hybrid advice model.The critical capabilities

75、 needed to develop a leading customer value proposition include a strong consumer brand,a low-cost platform built on scalable technology,and the right customer engagement tools for this strategy.The sophistication of the technology and engagement tools needed will depend on the platforms strategic r

76、ole,whether stand-alone or part of a broader offering.The requirement to develop winning capabilities is increasing as at-scale international players enter the UK market,so continuing to invest in these capabilities remains vital.Recently,many companies taking an organic approach to growth have stru

77、ggled to bridge the capability gap and attract requisite talent.There is an opportunity to acquire point solutions to gain some of the niche capabilities needed for market leadership.And given the long tail of smaller platforms,there is also an opportunity to acquire scale,which is critical,given th

78、at platform administration is largely a fixed-cost business.Indeed,large wealth and asset management players have recently been acquiring digital platforms to increase their market presence.For example,a large UK asset manager acquired a top-five D2C investment solutions company to gain an at-scale

79、position.Current market conditions could provide opportunities for those with the capital and operational capacity to invest.AdvisedSince 2015,advised assets have grown at about 7 percent annually to a total of about 1.2 trillion today.As in the D2C market,adviser networks and platforms are seeing i

80、ncreasing fee pressure While the D2C segments revenue margins are higher than in the workplace segment,margin pressure is increasing as participants compete for scale.8Capturing growth in the evolving UK savings and retirement marketand M&A activity as the competition for assets intensifies in the d

81、rive for scale.In the face of this pressure,participants looking to win in this market are being forced to adopt one of two models:vertical integration or targeted value chain participation.Each requires a distinct set of capabilities.Vertical integration.This model,which covers advice,administratio

82、n,investment solutions,and asset management,aims to attract assets through advice networks and capture revenue margin across several of these value chain segments.Participants adopting this strategy must develop an at-scale advice network with the potential to extend it into hybrid advice.They will

83、also need a top-quartile adviser platform,with the ability to add adviser tools as needed to improve effectiveness and efficiency,and to focus the declining population of advisers on mission-critical customer interactions while removing their administrative burdens.Finally,they will need to develop

84、a compelling investment solution and asset management offering to maximize asset capture in this high-margin part of the value chain.Targeted value chain participation.In this model,specialists will look to provide a distinctive,targeted offering,whether dependent on excellent service and support or

85、 low cost,to serve larger,integrated market players.For example,a specialist could act as a utility provider of platform administration services,acting as an outsourcing partner to vertically integrated companies.In this role,companies need leading capabilities in their chosen value chain segment.Of

86、ten this requires scalable technology;a fail-fast,agile culture;and strong analytics.One provider of wealth and asset management technology and business process outsourcing was able to radically reduce the costs of servicing and regulatory-related technology upgrades through process automation.This

87、targeted value chain play has enabled it to become a core part of the industrys infrastructure,while leaving the front-end customer-facing layer to individual companies to customize as part of their differentiated proposition.Some players have been successful pursuing M&A in the advised space(for ex

88、ample,rolling up networks of independent financial advisers)but do face challenges with integration,given the significant consolidation that has already taken place and the risk of advisers leaving after the deal is completed.M&A activity in the space is therefore likely to focus on platforms to rea

89、lize scale synergies and smaller advice networks.Looking forwardAlthough all four segments offer attractive pockets of growth,they also have a high bar for meaningful participation,and established incumbents and specialist new entrants are continually raising it.To compete,players will need to make

90、strategic participation choices based on their current portfolio positioning,their core capabilities,and the attractiveness of the growth areas in which they aspire.Across all market segments,there are common capabilities required to build cost-advantaged scale positions,with efficient and scalable

91、technology notably important.There are also a number of segment-specific capabilities required to win.Companies looking to enter or grow in the B2B,capital-heavy BPA segment must secure their access to capital,reinsurance capacity,and asset origination.The segment will continue to be most attractive

92、 to companies with distinctive investment capabilities that can originate long-dated assets,treating the liabilities as a form of permanent capital,or to those with large retail annuity portfolios for whom there are synergies.Companies looking to enter or consolidate their existing positions in the

93、consumer-facing areas will 9Capturing growth in the evolving UK savings and retirement marketSid Azad,Rajiv Dattani,Jonathan Deakin,and Leda Zaharieva are partners in McKinseys London office.The authors wish to thank Raman Bhan,Chien-Teng Chia,Alex DAmico,Sebastian Elliott,Aditi Jain,Nils Jean-Maire

94、t,Ross Macdonald,Sid Pandey,David Rogers,Shrey Sakhuja,Urmila Shenoy,and Archie Sinclair for their contributions to this article.Scan Download PersonalizeFind more content like this on the McKinsey Insights AppCopyright 2023 McKinsey&Company.All rights reserved.likely focus on the capital-light DC w

95、orkplace,D2C,and advised segments.However,the distinction between these channels is blurring.Successful companies from the United States and from other sectors such as banking have demonstrated the value of reorienting the organization and its mindset on specific customer segments to meet their holi

96、stic financial needs through the full life cycle.For insurers,reorienting to a customer-driven approach can help the introduction of hybrid models that sit across D2C and advised channels,offering greater flexibility to consumers looking to access advice for critical decisions and self-serve offerin

97、gs for their simpler transactions.This path may be open to participants who have a presence in any one of these channels today.Building or extending competitive advantages,however,will require meeting the rising capability bar that incumbents and new entrants have set,whether that means developing c

98、ompelling customer engagement tools,being at the forefront of new product development,or ensuring operations are built around scalable technology.Companies choosing to operate across multiple segments must bring together their capabilities in workplace,advised,and D2C segments to develop a coherent

99、consumer-focused offering.Success in this effort,however,will require significant investment in bringing together often disparate data and technology platforms and the ability to make the shift away from a product mindset to a customer mindset.All participants must balance a series of competing dema

100、nds in this period of uncertainty:building short-term resilience,meeting investor dividend expectations,and investing for through-cycle growth.The pace and scale of capability innovation required to capture this growth means that executives must strike a careful balance between investing to strength

101、en competitive advantage in existing segments and extending into attractive growth segments.Moving quickly is imperative;future market leaders are investing now to set up for long-term success in these fast-moving segments and embracing todays market uncertainty as an opportunity to forge ahead of c

102、ompetitors.10Capturing growth in the evolving UK savings and retirement marketFurther insightsGlobal Insurance Report 2023:Reimagining life insuranceInfusing tech talent into the UK insurance industryFrom saving to spending:A second front emerges in the US retirement challengeContact Sid AzadPartner,LondonSid_AzadMcKRajiv DattaniPartner,LondonRajiv_DattaniMcKJonathan DeakinPartner,London Jonathan_DeakinMcKLeda ZaharievaPartner,London Leda_ZaharievaMcK11Capturing growth in the evolving UK savings and retirement market