Half of pension funds set for early retirement

Newsroom 19/09/2007 | 16:38

Conventional wisdom has it that large players dominate the business scene with the little guys eventually pushed out. But in the mandatory pension market, the minnows are exploiting a market phenomenon to level the playing field and give themselves a fighting chance to take on the giants.
Fourteen large pension fund administrators have lined up for the four-month sign-up race starting this week, each with eyes on its own prize. World renowned and experienced players have prepared themselves for a neck-and-neck race for the pole position. They're in it for the long run and have tens of millions of euros riding on their victory. Then, there are the middle-sized players targeting 10 to 15 percent of the market and next come the small operators.
The minnows' experience in administrating pensions is small or non-existent and their target is not set on the finish line. Their means of operating are different from the others and their operational costs will be extremely high, according to some, or negligible, according to others.
“Small players, still not entirely ready to join the system, will enter the market in the latter part of the interval by resorting to multiple enrollments,” said Crinu Andanut, general manager of Allianz-Tiriac Fond de Pensii.
The term refers to cross-signing cases, in which the same client illegally signs up for more private pension funds after already having signed for one, leading to the invalidation of all contracts.
Clients end up in the “lottery,” meaning that they will be randomly distributed to one of the existing pension funds at the end of the four-month interval.
“We are very worried about this phenomenon. We estimate that between 30 and 50 percent of the Romanian market will be affected by it and all these people will end up in the lottery. Can we call this a success for the pensions system?” Andanut wondered rhetorically, expressing his hopes that the Private Pension System Supervision Commission (CSSPP) will step in and make a few changes to the legislation.
“Validation of portfolios must take place once every two weeks or once a month, instead of at the end of the interval, so that portfolios are ‘fixed' and no-one ends up building their entire business on sand,” said Andanut. He added that both Allianz-Tiriac and other players have been pushing for a change for some time now, but the CSSPP's answer has been vague so far.
Mircea Oancea, president of the commission, made it crystal clear.
“There has not been any adjustment to the norms yet, and neither do we plan for such a change in the near future. It is not our objective to respond to all the proposals or comments coming from the market. The commission's role is to ensure equal conditions for all the market players,” Oancea told Business Review.
“In former socialist countries where there was such a fixing procedure, the ‘first come, first served' type, there were many cases of double-signing, as well. The figure was about 40 percent in Poland, for instance,” said Ion Giurescu, vice-president of the CSSPP.
“It is clear that there will be cross-signing cases – it has happened everywhere in the world. We even drew up the norm so that brokers get paid at the end of the four-month period, but some operators decided to have it their own way and pay them along the way,” he added.
Unlike Oancea, he did leave some room for reconsideration.
“We will see how the market behaves and depending on that we might consider changing the norms,” said the vice-president.
Other players' take on the CSSPP's reaction to market concerns about multiple enrollments was different from Alianz-Tiriac's.
AIG Fond de Pensii, also a contender for the market leader position, applauded it.
“The commission was right not to make any decision. We were very outspoken on this: one cannot start making changes in the law five days before the system sets off. We cannot have a moving target,” said AIG FP general manager Mihai Coca Cozma.
“There are many things that could be improved, but it is too late now. Any change would entail alterations to our business plans and in the thousands of contracts that were already signed. Any change will ultimately up the number of cross-signed contracts,” he said.
Besides, the CSSPP does not have the technical ability to deal with the potential changes, nor should it concede to market pressures, said Coca Cozma.
The AIG FP head said estimates regarding the number of invalid contracts that have surfaced lately are largely exaggerated.
“I do not know how they came up with these numbers. There is indeed the risk of having double signatures, but the current legislation does not encourage multiple enrollments. There might be cases, but they will account for less than 10 percent of the contracts,” said Cozma.
Multiple enrolments will result in a more even distribution of formerly invalid contracts and thus lead to an increase in small players' client figures.
Some of these operators will retire before their contributors.
“There are certain funds which have entered the system just so that they can gather up clients and then sell off their portfolios,” said Cozma. “Within the next five years, only half of the current operators will still be in the business.”
The current number of operators is too large for a market that has optimistically been estimated to reach 3.5 million contributors.
“In Chile, the first market where such a system was implemented for the first time in 1981, there were 23 operators initially and now, when the first pensions must be paid, only six are left. There were 18 operators in Poland, and now there are only 12, while in Bulgaria there were nine and now there are six,” said Gilles Sohm, general manager of AG2R Fond de Pensii. “For Romania, 10 to 12 players seems a reasonable figure.
The fact that some estimate that there will be up to 18 funds on the market, which is a quite significant figure, sheds light on speeches about how ‘small' commissions are,” said Sohm.
The market is extremely competitive and dynamic, therefore all players expect a great deal of mergers and acquisitions.
“We expect to see such movements in a maximum of three years. One of the elements leading to mergers might be the fact that each fund must attract a minimum of 50,000 contributors or it will be dissolved and taken over by other administrators,” said Cristina Nitescu, general manager of Omniasig. She also expects the market to narrow down to about ten in the first two years of activity.
“In three to four years, we will witness some acquisitions on the market and have a maximum of eight to 10 operators. Five will disappear rapidly, in the first phase of the process, and big players will then accumulate more and more clients,” said Andanut. The move is natural and financially commonsensical.
“If we take the number of participants and divide it by the number of operators, we get an individual number of contributors that is quite low and thus administratively inefficient. I do not have a crystal ball, but we might witness the first exits quite soon along the way when some administrators prove unable to gather the mandatory 50,000 clients. A second phase for regrouping might come up when the first pensions are due and operators that are inexperienced in managing pension funds will withdraw leaving room to the true specialists,” said Sohm.

Administrators seek edge of the finish line
Until some of the players go bust, the crowded stage has prompted operators to employ various strategies that will put them ahead of the competition.
Perhaps the most recent and resounding is Aviva's acquisition of the oldest local asset administration company, Certinvest. The transaction was closed just five days before the system's debut on September 17, a perfect timing for those seeking to get an edge on contenders to the first place.
“This acquisition is a new phase in reaching our development objectives for Central and Eastern Europe,” said Pierre-Olivier Bouee, CEE Director with Aviva Europe.
Aviva said it would heavily rely on Certinvest for the proper administration of its clients' assets and for upping investment yields, while keeping Certinvest's CEO Eugen Voicu in his seat to ensure that the firm's previous performance is passed on to the company.
Other funds have placed their bets on smaller commissions than what the competition is offering.
AG2R FP decided to decrease the 0.6 percent charged by other players to a fee of 0.54 percent of each client's annual capital. “The difference is not as high as we would like it to be, but we first must ensure the proper functioning of the system. This reduction of the administration fee is our way of showing that we will try to have the most profitable commission policy possible for Romanian employees who trust us,” said the company GM.
Aside from a battle over costs, there is also one over risk levels and yields.
So far, only one of the 14 pension fund administrators, Generali FP, has decided to leave the medium-risk platoon and offer a high-risk product.
“We think that this investment structure is a modern one, which will ensure one of the best yields on the market while keeping safety and stability parameters,” said GM Ioan Vreme.
“We are the only ones to offer a high-risk prospect; however, we do not risk people's assets, but go for a mixture of investments that will increase profitability,” said the head of Generali, which is going for a 10 to 12 percent market share on the mandatory pensions market.
Before even meeting its market-share objectives, the company has entered the competition on investments, in which administrators boast bigger and bigger figures and constantly increasing hoards of marketing agents.
Generali invested EUR 2 million in promoting its offer on all media channels, while its total investment in private pensions adds up to ten times as much, said Vreme.
AG2R spent EUR 8 million to set-up a local branch, and estimates to have almost 4,000 agents promoting its products through affinity groups.
Allianz-Tiriac has put EUR 4 million in the marketing campaign for second and third pillar pensions and has amassed about 70,000 agents, 22,000 of its own and 50,000 brokers. Contender AIG Life has rounded up 5,700 of its own agents for mandatory pensions already and is aiming at gathering up a total of about 10,000.
Omniasig will put in EUR 1 million in the campaign starting this week and about 15,000 of its own agents, brokers aside, said Nitescu.
ING FP has also authorized about 40,000 marketing agents, and has 5,000 others in line for approval.
More than 110,000 agents were already authorized by the CSSPP last week, and their numbers have risen higher since, as administrators have gone out of their way to announce ever increasing amounts for the past month. The final estimated figure stands at about 250,000 agents.
Money and work force aside, studies certify that administrators' good name is what will draw in most clients. For that reasons, even world-known operators have teamed up with well-regarded local players that might give them a boost in credibility and later on profits. Take the Banca Transilvania -Aegon or the AIG FP – Raiffeisen Bank partnerships.
Other players decided to do it on their own.
“Considering the importance of the Romanian market and its economic dynamism, for the first time we have decided to be present here under our own brand,” said Sohm of AG2R.

Ana-Maria David

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