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Pillar II started the consolidation race


One year ago, the mandatory private pensions market (2nd pillar) did not exist. The pension companies had just started the chase for customers and the results at the end of the four months of initial signup campaign exceeded all expectations: over 4 million participants got into the system. Ever since, the mandatory pensions market developed quickly: it collected and started to invest the participants' money and, more recently, witnessed the first transaction between two pension companies. The first merger of funds is next, and the following year could bring a major reform of the system, defined by two terms: liberalization and modernization.

So far, the mandatory private pensions market has experienced spectacular trends. After the initial signup campaign, when the participation rate exceeded even the most optimistic forecasts, on came the first collection of contributions, with almost one million empty accounts - situation that improved constantly over the past several months. If this May only 3,195,000 out of the 4,156,000 participants received contributions, namely 961,000 were left with their accounts empty, by September the total number of participants reached 4,363,000, and the number of those with at least one transferred contribution went up to 3,779,000 - that is only 584,000 empty accounts.

The amounts managed by the 14 funds that stayed on the market (with 18 starting off, of which four withdrew right before the first collection of contributions) increased as well, in line with expectations: at the end of September, the net assets managed by the mandatory private pension system exceeded 136 EUR million, with a potential to reach 210 million euros or even more by the end of 2008. Thus, the 2nd pillar market started on the right foot and has recently witnessed the first announcement about a transaction between two pension companies: BCR Group (part of ERSTE Group) announced the acquisition of OMNIASIG Pensions, for an estimated amount of 13.2 million euros, with the merger of the two funds (managed by BCR and OMNIASIG) planned to take place thereafter.

Shifting from quantity to quality

The initial campaign was described by the magic word "quantity" - as the funds struggled to get as many customers as possible - but the market's image became clearer after the first collection round and allowed for the first assessments of the "quality" of portfolios built up by the funds. In the "quantity" chapter, the mere observation of the enrolling campaign and the ranking of the funds according to the number of participants they attracted is enough to provide an overview of the market. The big winners in the race for customers were ING, ALLIANZ-TIRIAC and GENERALI, whose funds were the only ones to meet the ambitious targets set one year ago. AVIVA, INTERAMERICAN and AIG, ranking 4th through 6th, also yielded good results in their battle for participants, thus securing comfortable positions on the market.

But what types of customers were attracted by each fund? Who are the best paid customers and what funds reached them? Various qualitative assessments of the mandatory pension funds' portfolios managed to give the following answers: ING, AIG, BCR and BRD are the funds that attracted "the most valuable customers" - with high income, for whom they collect higher contributions, therefore bringing higher revenues to the pension companies.

The conclusion is that the leaders on the Romanian life insurance market (ING and AIG rank first and second on the life insurance market) and from the banking environment (BCR and BRD are the largest banks in the local system, according to their assets) attracted the "top customers" - with already massive portfolios containing customers much better paid than the national average, whom they easily persuaded to signup for the funds they manage.

Besides this explanation regarding the business model, other factors can also explain the differences in the quality of portfolios belonging to the mandatory private pension funds. The battle for Bucharest (Romania's capital city), for instance: the four funds listed above are exactly the ones that sold much better in the Capital than throughout the country, which translates into higher market shares in Bucharest than in the rest of the territory. And, since the average salary in Bucharest is 40% higher than the national average (according to the National Institute of Statistics), the geographic distribution of the customers secured these four funds a better portfolio.

The breakdown per gender and age groups of the attracted customers is also relevant for the portfolios' quality. The statistical assessment based on these two criteria indicated that ING and AIG are the funds with the highest share of women, above the market average - a paradox, given that the national average of salaries of men is about 10% higher than of women. As for the age criterion, the assessment of the portfolios revealed that the funds with the highest age average are again the four ones: ING, AIG, BCR and BRD - customers with an average age of 40 (Romania's baby boomers, born in 1968) were the key-element for a better quality of the portfolios belonging to the pension funds, as they are closer to the peak of their career, therefore receive a better pay. Besides the four funds, another few have portfolios with a quality above the market average - ALLIANZ-TIRIAC, BANCPOST and OTP.

First collection, then investment

Launched in the maelstrom of the international financial crisis, the mandatory private pension funds had no option but to make very prudent investments, so as to preserve the value of the collected contributions by placing their assets in fixed-income instruments and avoiding plunging stock exchanges. Funds relied mostly on state securities and bank deposits, with traded corporate bonds ranking third in their preferences.

By the end of August, listed shares and mutual funds represented less than 5% of the total investments in the mandatory pension funds. In just four months, their share halved, as stock and mutual funds represented 10% of the funds' investments in May. In other words, a very conservative strategy that, to a certain extent, provided shelter for the pension funds against the unfavorable conditions in the capital market. After the first nine months of 2008, the Bucharest Stock Exchange lost 50% of its market cap and another 26% in just the first 10 days of October.

However, on the medium and long term, shares bought at low prices shall now prove to be profitable business for the funds, according to the pension companies. Unlike the pension funds from the region, that sustained major losses due to the international financial crunch, the pension funds from Romania can speculate the bearish market context, especially since they don't stand to lose anything, as their accumulated assets are low and currently invested in minimum risk instruments.

Preparations for a new reform

The first year of mandatory pensions has barely ended and the supervisory authority already announced several proposals prepared for a substantial reform of the system, in view of its modernization and liberalization. Firstly, two laws (on the Guarantee Fund and on the private pensions' payout phase) shall supplement the core legislative framework of the 2nd pillar. Both of them are expected to reach the Parliament's desks in the first half of 2009.

But until then, CSSPP (the Private Pensions Supervisory Commission) is working on a norm on investments for the mandatory private pension funds that should bring together all provisions on assets investment and give the start for investment liberalization, allowing the funds to also invest in other financial instruments, not just in the traditional ones. The list of the newly accepted instruments includes risk capital funds, real estate assets or mortgage bonds. 2009 might also bring a law to relax the maximum accepted quantitative limits for investments on various asset classes.

For 2009, CSSPP announced that it also plans to promote a law on introducing the multi-fund system (lifecycle funds), whereby each pension company shall manage not one, but two or three mandatory pension funds, with different risk profiles, tailored for the participants' different age groups. Slovakia adopted this multi-fund solution from the very beginning, while Hungary and Bulgaria area getting ready to adopt this reform next year. The multi-fund solution is intended to streamline the funds' investment performances and better match them with the participants' expectations, age and risk appetite.

Therefore, Pillar II is getting ready to advance through a new reform - reason enough for all eyes to be set on this market next year as well.

22.10.2008

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