Helping to break the shackles

Consultants face many tasks in the developing pensions market of Cyprus, not least that of reassuring clients still rattled by the local stock market crash. And there is still a long way to go in educating the boards of trustees in investment.
Philippos Mannaris, consultant at Hewitt Associates in Athens is the firm’s business developer for Cyprus and the middle-east. He says Hewitt is the only major multinational firm offering actuarial and benefits consulting services to Cypriot clients. In Cyprus, there are two or three small local actuarial consultancies, he says.
The defined benefit (DB) market is quite small in Cyprus, and it is mainly public authorities offering this type of plan. “The private sector primarily offers defined contribution (DC) plans - known as provident funds – with modest contribution rates,” he says. The exception to this is the oil and gas sector where traditional DB lump sum and DB pension plans exist.
These funds are all run by boards of trustees, and they are responsible for the investments. They invest in all major asset classes, with the larger funds doing so directly. Smaller funds use collective investment vehicles offered by the larger financial institutions, says Mannaris.
Providing investment and pensions advice to clients in Cyprus is a Sisyphean task right now, says Christos Spanos, executive director, advisory, at XS Capital in Nicosia.
Spanos points out that the local financial industry is marked by three major developments over the last decade. In 1999, interest rates were liberalised; in 1999 the Cyprus Stock Exchange (CSE) surged forward to 830 points from just 74, but then crashed all the way back to 70 over the next four years. Also, until 2004, there were restrictions on capital flows, which meant that no local entity could export funds.
The lifting of restrictions has meant that some pension funds are now looking at overseas investments as well, says Mannaris.
These developments, and the fact that most provident funds are run by a committee of employees with little or no financial knowledge, says Spanos, have meant that many funds were invested in deposits primarily and a few local government bonds – which are highly illiquid.
“The explosion on the CSE and the lack of alternative investment options lured many fund committees to overweight the CSE and end up with huge losses and enraged employees,” he says. “This has meant that they became ultra-conservative and returned to holding their assets in deposits to the detriment of performance.
“All committees want to be helped in carrying out their tasks given their limited knowledge but are fearful given their negative experience with the CSE and some less reputable advisers,” he says.
“The situation is now beginning to change as the investment universe of such funds has finally opened up to allow overseas investments,” he says. “But more importantly, the European directive requiring the hiring of professional advisers is pending implementation.”
Clients, says Spanos, are not really knowledgeable enough to know what to ask for from their advisers.
“Risk management, benefit design etc are bitterly needed but the committees are still not fully aware of who should be doing what; one of the most sought after advisers is a human resource firm that actually defines asset allocation!” Many funds are implementing a multi-manager approach, he says, but even they tend to do this in an ad hoc manner.
Mannaris estimates that DB pension assets in Cyprus are around €0.9bn, with DC Provident Funds holding assets of around €0.8-€1bn. There have been no big changes in pensions law in Cyprus since the 1981 Provident Fund law, he says, and the next big change the industry will witness is the implementation into local legislation of the EU Directive 41/2003.
Up to now, pension consultancy services in Cyprus have focused entirely on actuarial funding valuations and accounting valuations under IFRS, he says. “Investment consulting services for pension funds is a new area,” he says.
The provisions of this directive might be standard practice in other EU countries, says Marios Yiannas, actuarial consultant at HCM Consultants (SEMEA), but in Cyprus they will essentially create the framework for the operation of occupational retirement plans.
Pension plans will need to comply with the requirements of the directive, and these are very demanding compared to what has been asked of pension plans in the past, he says. “The role of the investment consultant and the need for education on pensions and investment matters will be upgraded,” he says.
The need to comply with other EU legislation on relevant issues - the new portability directive, for example - will also cause major changes in the industry, says Yiannas.
Spanos says that given the negativity that has been created around the industry in Cyprus, most funds resort to the major banks and audit firms for advice.
“Pure asset management firms, such as our own, are few and far between in Cyprus while independent advisers have appeared only recently given the opening up of the industry,” he says.
HCM Consultants - part of HCM International - is a recent entrant to the pensions and investment consultancy market in Cyprus, says Yiannas. The market is not very developed, and the key to the firm’s expansion is to educate trustees and company directors on pension matters, he says.
“The biggest business challenge that we are facing is the lack of awareness on the role of the actuary as investment consultant and the need for active risk management,” he says. “The decision-making process in most Cypriot companies is very slow and is mostly in the hands of a few individuals. The role of the trustees is well developed but only in terms of their administrative duties and there is no awareness or education on their role in investment matters.”
Between 80% and 90% of pension assets in Cyprus are invested in short-term deposits, because of a lack of confidence and knowledge of the various investment types available, and due to the Cyprus investment environment in general, he says. So any progress is likely to be slow.
“The business environment is even more challenging due to the lack of suitably qualified and independent consultants who provide advice on pensions and investment issues,” he says. He claims their’s is the only company in Cyprus that employs UK and US qualified actuaries who work in the pensions industry, says Yiannas, but he adds that this is not easily appreciated by the market.
Local banks in Cyprus, he says, very often offer strategic investment advice and a very basic ALM exercise free of charge– or for a very small fee - in order to get the investment mandate for itself.
“This is a huge risk for DB schemes because there is no independence… and in addition no proper emphasis is put on the liabilities since the people advising are not actuaries and do not understand the liability risks of running a pension scheme.”

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