Spain's faltering step
The Spanish pensions’ market’s equivalent of the Big Bang, the externalisation of company pension assets in 2002. This created a new universe of second pillar occupational pension plans, managed by Spain’s gestoras.
Since then the universe has barely changed. The biggest event of 2004 was the award of a mandate to BBVA to manage the pension scheme of some 500,000 central government civil servants. However this is more significant for the headcount than the assets.
Perhaps more significant is a government reglamento in February this year, intended to encourage small and medium size enterprises - known as PYMES - to enter the second pensions market, either individually or jointly.
To what extent are these and other developments likely to provide new opportunities for Spanish asset managers? In the long term long term the signs are encouraging. As elsewhere in Europe, demographic change in Spain is weakening the first pillar. The dependency ratio has grown from 1:7 in 1982 to 1:3 in 2003. It now is officially accepted that state pensions will come under strain by 2015 and the private pension market is expected to take some of this strain.
Spanish pension funds grew steadily between 1995 and 2002, with an average growth annual of 21%. Some types of pension plan have grown faster than others. According to figures from Inverco, the Spanish investment and pensions association, the number of personal pension plans increased by 12.7% to 895 in the 12 months to June 2004, while the number of occupational pension plans fell by 23.2% to 1,199.
In the same period, the assets of individual plans increased 18.3% to e32.8bn, while assets in occupational plans increased 5.8% to e23.9bn. Membership of both types of scheme also increased. Personal plan membership increased 12.6% to 6,777,416 while occupational plan membership increased by 14% to 721,912.
The pensions market is dominated by Spanish banks and savings banks who together hold 85% of pension assets. Five out of the leading 10 ‘gestoras,’ which manage pension assets and administer pension plans, handle between 60% and 80% of these assets.
These gestoras have seen a pronounced fall in occupational pension business since the completion of the externalisation process. Miguel Sard, director of group pensions at Santander Central Hispano (SCH) Gestion de Activos, says: “What happened at the end of 2002 was the end of externalisation. In 2003 the decrease was not big but in 2004 there was a clear stop on the market.”
Pension insurance policies - used principally for defined contribution schemes for senior staff and management - have been affected less than pension funds, he says. “Insurance contracts are not growing quite so fast in terms of volume but there are a lot of new policies. None of them involve large amounts of money, because all the large amounts were externalised at the end of 2002 or during 2003.
“On the pension funds side there was a definite halt. It’s now quite difficult to find new companies creating pension funds. Pension funds are a second pillar product where there are some problems, especially for the employer. One of the drawbacks is that you are obliged to include all employees of the company, whereas with an insurance policy you can include only who you want.”
One possible source of new pension fund business are the small and medium enterprises, or PYMES. These are a key part of Spain’s economy, with some two million employers with fewer than 20 employees. However, Sard is not optimistic. “To be honest, there is no obvious trend in the market for PYMES to set up pension funds, because they are not really useful to them.”
In the current economic climate, the PYMES may be reluctant to take on the extra cost of providing a pension fund for their employees. Angel Martinez-Aldama, director general of Inverco, which represents pension funds in Spain, does not expect any rapid growth in pension funds set up by small and medium companies: “There is little evidence that companies are actively discussing with the unions setting up these pension plans, especially the small or medium companies,” he says. Employers are clearly more focused on reducing contributions to the pension system than adding further expenses
One way to encourage the PYMES is through joint pension plans, the planes de pensiones promocion conjunta. The government introduced this idea several years ago to encourage greater interest in occupational pension funds. It enables companies with fewer than 250 employees to combine the management of their pension funds within a single scheme and thereby benefit from economies of scale.
Unlike the traditional occupational fund, whose assets are managed by a single gestora, all pension funds, and in particular joint funds, will be able to use a number of asset managers. a problem could arise when the management of the assets and the administration of the fund are separated
Among the gestoras, BBVA and Caja Madrid were early promoters of joint pension plans and several schemes are now up and running
There are tax incentives. PYMES will be able to claim tax relief for employees earning up to e27,000. The government also removed some of the administrative obstacles to setting up multi-pension funds in its reglamento of 20 February this year. However it may not be enough to encourage employers, says Martinez-Aldama.
“Some the conditions have been lightened, but now it is up to the promoters and the unions to decide whether to set multi-pension funds up. It is a good development but it is not enough to increase the number of pension schemes for PYMES if the social partners do not agree within the collective agreement discussions.”
Luis Vadillo, an investment consultant at Mercer Human Resource Consulting in Madrid, agrees that the market for PYMES pensions has yet to take off. “Companies are only just waking up. The interest of doing this type of pension plan is growing. But the ignition has not yet happened.”
The government has tried to provide the ignition by putting its civil servants pension fund, the General State Administration, into a second pillar scheme. Vadillo says this has sent signals to the private sector. “The government set up the civil servant pension fund to take advantage of the reglamento. As the biggest employer in the country, it is gaining first mover advantage and setting an example for companies to set up their own pension funds.”
This contest for the pension fund of 530,000 central government civil servants attracted seven gestoras. In the end the mandate was won won by a joint venture by BBVA and the unions Spain’s two largest unions the UGT and CCO.
Juan Costales, director of investment Grupo Caser, which came second in the contest, says the BBVA business will be more attractive for cross-selling rather than for the size of the assets: “There is not going to be a lot of money but there will be a lot of people. In a market which is controlled by the banking sector it is quite useful to have all these potential clients under one umbrella.”
The auction itself was a daunting process, with the gestoras required to complete 600-page questionnaires. Yet Costales says the time spent on the auction was not wasted. “It is the first of such auctions and it will mark the path for the following ones. They will not be so intensive because we have already done the work.”
Future auctions will be held by Spain’s local government bodies notably the councils of the 17 autonomous regions. Grupo Caser has already won one such auction, the pension fund for the Principality of Asturias, and Costales is sure other will follow. He points out that Caser has several advantages in any contest. Its 11,000 branches heavily outnumber BBVA’s 3,000, and it is a member of the savings banks whose main presence is outside the main cities
“You also have to bear in mind that the national health service has been transferred from central government to the autonomous regional councils. So currently that is an opportunity for the Spanish gestoras and could represent interesting future income.”
Competition between the gestoras for private sector companies is fierce and fees are notoriously low – often below 0.5%. Furthermore, companies may choose gestoras because of the loans and services they can get from their parent banks rather than their performance of their asset managers.
Perhaps for this reason there have been few signs of pension funds moving away from relative to absolute returns. Most pension funds are still staying close to benchmarks. Sard of SCH says: “In Spain the second pillar pension funds are still working a lot with the benchmark concept. The main problem with that, from our point of view, is that although we can beat the benchmark the profitability is poor. In 2002 we beat almost all the benchmarks but the yields were negative in many funds. Then you have the problem with the client.
“The benchmark should be a long term index. But due the activity of the market - competitors, pension funds and consultants - in the end the benchmark is not an index but a kind of barrier.
“Following an index means we are not giving enough added value to the control committee or to the participants in the pension fund. What we want to do is not to leave the idea of the benchmark entirely but to at least to introduce clients to other kinds of investment models. And we are starting to talk right now about total returns and to try to at least obtain yields one or two percent higher than inflation.”
Some gestoras have built their reputation on their refusal to follow a benchmark – notably Fonditel, the gestora for the 32 Telefonica companies. Luis Peña chief executive officer of Fonditel,says: “The way we work is absolute returns. People don’t want to lose money so our lowest level of performance is zero. We are looking for strategies that are alpha searchers. We are not benchmarkers, because benchmarking leads to mediocrity.”
Peña says Fonditel’s business strategy is to focus on companies without debt and with an open mind about risk. “These are companies without problems of debt, so they don’t need to go to the banks for resources. We are looking for people who want to take risk that they can’t manage.”
In addition to the pension funds of the Telefonica companies, Fonditel manages the assets of eight outside clients, including multinationals Gillette, Procter & Gamble and Bacardi, and domestic enterprises Enusa and Muprespa. Peña says Fonditel expects to take on up to six more company schemes over the next six to 12 months.
“People know that we are a boutique so in a sense our capabilities are well defined. When the client comes to Fonditel they know what they want – in this case medium to high volatility.”
Fonditel gives clients a level of volatility equivalent to the risk they can afford typically this will be between 4 and 6 % for medium risk and 8 and 12% for high risk. “We tell our client that if the volatility increases substantially we will exit the market We think this is easier to understand than an asset allocation strategy.
With the markets recovering Peña expects to see companies switching to gestoras who can provide better returns. “Pension funds can tolerate three bad years of returns because the market is not making money. But when the market is making money they will want to know why they are not getting their share.”
Market prospects for the international asset managers, who form the second the second tier of asset management are more limited. International asset managers in Spain, who include include Schroders, UBS, BNP Paribas, Templeton, Invesco, Merrill Lynch and JP Morgan Fleming , have found that effectively 99% of the second pillar market is closed to them.
“Arguably Portugal has the highest barriers of entry of any market in Europe for international managers,” says David Burns, country head for Spain, Schroder Investment Management in Madrid.
Foreign managers have therefore tended to concentrate on the wholesale and retail, third pillar markets. They have had some success, says Burns. “When I arrived in 1998 international non Spanish mutual funds represented less than 5% of the market. They now represent just over 20%”
Burns says medium term prospects in these markets are promising. “We have a situation in Spain where the total pie of assets under management is e300bn and as much again in unmanaged assets – money in current accounts, deposit accounts and under the mattress – and where the savings ratio is low but growing. So the general feeling is that over the next five years the managed market will perhaps double.”
There are also more opportunities to market their funds through third parties. “Open architecture has become quite popular in Spain, where you can buy any one of 4,000 funds on a platform. We’re also seeing the beginnings of ‘guided’ architecture where the distributor in question will select five to 10 banks as third party providers.
“The main business we’ve developed is retail distribution where we sell a fund range through third party distribution agreements with Spanish banks and savings banks. We’ve now got 66 distribution agreements which gives me access to in theory 8,000 points of sale”.
Competition between fund providers is fierce and rankings are all-important. “What we’re seeing in Spain is the fund selectors in banks and savings banks are becoming increasingly quant-driven They will use S & P, Morningstar or Lipper or develop their own models. You’re either in the top three or you don’t get in.”
Burns suggests that the individual pension plan market will grow more rapidly than occupational pensions, although both will grow. “This is a market waiting to happen – in fact it’s already happening”
He plans to use his existing distribution channels to tap this market. “In the same way as I sell one of my products through a retail channel, that same channel will also be selling personal pension plans, and I can get my product into these plans. So part of the work is already done.”
The growth of third pillar pensions provides enough business for international managers locked out of second pillar business, says Burns. In time they may have access to this business. But none of them are holding their breath.