DC – Next Stop EuropePosted on: 25 March 2008 by Gareth Hargreaves
For a major asset management house and DC pension provider looking to expand into Continental Europe there are a number of barriers to overcome.
For a major asset management house and DC pension provider looking to expand into Continental Europe there are a number of barriers to overcome. Most notable are the resistance of national governments to change, especially when political popularity is at stake, and the conservatism of certain local cultures. Language is by no means the only factor that sets nations apart.
When considering a potential market, seven key questions have to be asked:
- Is there any pension reform process in place?
- If there is, will it encourage the establishment of DC schemes?
- Are existing occupational schemes funded or unfunded?
- Is the trend away from pay as you go and book reserve towards funding as we know it?
- If the move to DC has already started, is the emphasis on occupational schemes, individual plans or a blend of both?
- Is there a tendency for funded pension products to be insurance based?
- How big is the potential market?
Let’s now look at the current state of pension play and the prospects for DC in six major European States: Italy, Germany, France, Spain, Sweden and Holland.
In Italy, there are DC schemes both in the form of industry group arrangements (these tend to be trade union based – for example, for chemical workers) and individual plans. There are closed and open types of arrangement. The closed variety, established under the FONDO Pensione (1993 law), are not occupational schemes as we know them and have been slow to grow. Only around one-third of those eligible actually join up and, once they have done so, have to stay in the scheme for a minimum of five years. There is cut-throat price competition between the fund manager providers, and the slow rate of growth is prompting those from outside Italy to rethink their strategy.
The banks dominate the open type of arrangement, with most of their investors coming from the ranks of the self-employed and workers opting out of closed schemes. Brand awareness is one of the keys to success, and this is a major obstacle for an outside fund manager to overcome. But there may soon be a new opportunity to build assets under management by piggybacking on the distribution power of the banks. The outsider will do this not as a distributor in its own right but by having a place on another institution’s multi-manager panel.
TFR is Italy’s version of the UK’s statutory redundancy scheme. The lump sums available tend to be generous, and the previous government in Rome was keen to introduce legislation requiring ex-employees to invest the money in an open pension plan. Will the proposed bill actually become law? In the wake of the recent general election, we shall probably soon find out.
Germany would appear to be the biggest potential DC market on the European mainland for our major asset management house. But this is something of an illusion, as it is the life assurance companies which have historically tended to be the dominant funded pension providers.
The Berlin parliament has recently approved landmark changes in Germany’s national pension system, enabling the government to sponsor private sector DC funded retirement benefits. It will be a case of transition rather than shock. Workers will be encouraged to invest up to 1% of their gross earnings in 2002 and up to 4% starting in 2008 with an overall annual contribution limit of around €2,100.
There will be individual funded pension accounts as well as occupational schemes. Contributions will be deducted from salary net of tax relief, leaving the provider to reclaim the relief from the tax authorities. However, as the new arrangements will be limited to an insurance approach incorporating certain guarantees, the main opportunities appear to lie with the life assurance companies rather than the investment houses.
And so to France whose government seems to be waiting for the adoption of the EU Directive on supplementary pensions. It could be a long wait. Although there are company schemes (mainly DC) for senior executives and for the self-employed, the life offices seem to have this sector of the market sewn up.
There are also tax sheltered company savings schemes for salaried employees, and these are the closest thing to occupational arrangements as we know them. Within limits employers can contribute as well as their employees. Payments into and out of these ‘PEE’ schemes are income tax-free. These arrangements tend to be sold by the investment management arms of the major banks.
With intense competition between fund managers for market share, an emphasis on short-term past performance and charges, and a partisan preference to buy only French, what chance does our outside asset management house stand of gaining a foothold in this highly nationalistic market? There seem to be two possible opportunities. One is to vie for a place on the multi-manager panels that local life offices and asset management houses are now making available. The other is to promote its ability as a high tech administrator and communicator.
Spain offers few opportunities to our outside asset management house. The state pension scheme is very generous. The few company arrangements that do exist have tended to be of the book reserve variety, but these are now having to move to external funding. This development is largely behind the current move towards DC. There are two forms of retirement savings plan in Spain. Contributions into the Gestoras type of pension fund are tax deductible while those into a life assurance plan are not.
The large Spanish banks that dominate the collective investment scheme market are prepared to cut charges to the bone – to nil, if necessary! – to defend their position. The life offices’ presence lies mainly in the field of individual savings plans. For our outside asset management house one possible means of entry is to offer its expertise to small savings banks and life offices that don’t have an investment management capability in-house. But there is still one major obstacle to overcome – the maniana attitude of the Spanish public. Although comfortable with cash and bonds, the cult of the equity has yet to percolate through to them.
In Sweden we find, despite the absence of occupational schemes as such, what is effectively the part-privatisation of the first pillar of pension provision. PPM is a mandatory DC scheme with employees contributing 2.5% of their income to boost the reserves already held. With hundreds of investment funds to choose from and some 60 or 70 providers, individuals are spoilt for choice. However, around 50% of contributions find their way into the default fund (the 7th AP Fund) with its balanced portfolio.
There is also second pillar private pension provision. This too is mandatory and consists mainly of trade union and affinity group schemes. As these can only be arranged with life assurance companies, on the surface they present little or no scope for an outside fund manager. And the
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