Three broad developments in European pensions are creating new business opportunities for third party fund administrators.
The first is the move towards defined contribution (DC) schemes in countries like Italy and Germany. Germany’s first DC products, Pensionsfonds promoted by social security minister Walter Reister, are expected to produce a flow of more than €50bn in retail and institutional funds.
DC schemes are natural candidates for outsourced administration, as the UK demonstrates. Figures from Capita Hartshead, a pensions research firm, show that by the end of last year third party administrators managed 55% of DC schemes in the UK. Only 6% of schemes are now managed in-house.
The second factor is the progressive removal of fiscal barriers in Europe. This will have the effect of commoditising pensions and forcing providers to cut the cost of administering their funds. In the UK, for example, the government’s stakeholder scheme has compelled pension providers to halve their administration costs to 1%.
The third factor is the need to bridge the “pension gap”, the gap between what European countries are prepared to pay pensioners and what future pensioners will need. Research suggests that about €6 trillion of long-term funds will be needed to bridge this gap, and that Europe has some €8 trillion of bank deposits. Third party outsourcers will play a key role in putting this money to work.
SunGard, the US-based IT and e-processing group, is currently looking to Europe for DC business. David Kennedy, president of SunGard Employee Benefit Systems, says: “We are looking at the UK, Germany, in fact all the countries that have passed some sort of DC legislation.
“We are also looking at an acquisition in Europe as we intend to have a much larger European presence. We are looking for someone with market expertise, someone that will bring us more business.”
The acquisition is likely to be another third party administrator (TPA). Like many software companies, SunGard both competes and collaborates with fund administrators. Last year it signed international agreements with both CIGNA and CitiStreet – a joint venture between Citigroup and State Street – to use SunGard’s DC plan record-keeping software OmniPlus.
More recently, it launched MyPlanAdmin, an application service provision (ASP) for the DC market. ASP is the delivery of applications over a wide area network – including the internet – to multiple organisations from a datacentre.
“We want to take MyPlanAdmin international,” says Kennedy. “It’s basically a framework that we can take into any market. It gives plan sponsors and third party administrators the ability to offer more private-labelled products at a higher level of service without compromising cost and technological expertise. We run the infrastructure behind the scenes while our clients are positioned as the technology innovators.”
Cogent, the fund administration arm of Australian financial services group AMP, also has its eye on Europe. The move of Margaret Harwood-Jones, former head of HSBC Global Investor Services, to become Cogent’s director of client services and marketing, has provided the company with an opportunity refocus its European operations.
Anthony Wolfe, previously director of client services and marketing, will move to Cogent’s global executive team, as director, strategic business development, reporting to Tony Solway. Wolfe will focus on the entry of new markets, particularly Europe.
Nick Hirst, managing director of Cogent Europe, says Wolfe will be looking for partnerships in a number of countries, including Switzerland and Germany: “We are currently in discussions with a couple of groups. Our view is that we need to give a very strong local flavour to European operations. It would involve us opening up an office on the ground, and developing a partnership with a local provider, as we have done elsewhere. We are not going to go in and replace 150 back office staff with an operation of 20 people. We would expect to work with the existing infrastructure.”
Luxembourg-based European Fund Administration (EFA) is also taking a country by country approach to gaining business. EFA, a joint initiative by four Luxembourg banks (Banque de Luxembourg, Banque et Caisse d’Epargne de l’Etat, Banque Générale du Luxembourg and Kredietbank Luxembourg) has built its business on the administration of investment funds, and is now extending this to pension funds. It has won fund accounting mandates for the Grand Duchy’s first two Sepcavs (sociétés d’épargne a capital variable), open-ended pensions savings companies with variable capital designed for DC pension schemes.
The market for Sepcavs is growing, but slowly. Sepcavs, and their DC counterparts Asseps, are ideally suited to pan-European pensions provision, but the tax barriers have still to come down. Christophe Lentschat, EFA’s product development manager, says: “At the moment the pension fund market is limited, and is not profitable for managers short term. But everybody wants to gain pension fund business to acquire expertise for when the market grows.”
In these circumstances, he says, outsourcing is a good way to of spreading the administration costs of a pioneering pension fund vehicle like Sepcav.
In the meantime EFA will take a bilateral rather than pan-European approach to business acquisition. It plans to open local offices in France, Belgium and Switzerland. It will also look for Sepcav and Assep business in Germany. “We will look at the market country by country, deciding which will be the best product for a particular market,” says Lentschat.
UK-based Marlborough Stirling is also poised to expand into Europe. Marlborough Stirling floated on the London stock exchange earlier this year partly to fund its growth in Europe. It has focused its European effort on the pension markets of Germany and Italy. “Italy and Germany seemed to have greatest claim from a fiscal point of view of tackling the growing pension crisis,” says David Edwards, the international marketing manager responsible for driving Marlborough Stirling’s European expansion.
Marlborough Stirling already has a platform for European business. Last year it bought Life Strategies, a Dublin-based actuarial consultancy, for £5m (E0m). Since it was set up in 1993, Life Strategies has built a niche business advising European and US financial services groups setting up cross-border life assurance operations within Dublin’s IFSC. Clients include Citigroup, CGNU, Allianz, Société Générale and numerous leading Italian financial groups.
“Life Strategies have been able to introduce us to a number of organisations in the Italian market who are looking to do more than single products out of Dublin,” says Edwards. These include bancassurers and fund managers looking to set up personal pension schemes.
Marlborough Stirling intends to operate on its own as a TPA in Italy. However, Germany will be a harder nut to crack. “In Germany we would only do third party administration together with a major provider,” Edwards says. This could take the form of a partnership with a Germany-based multinational life group.
Marlborough Stirling is banking on its Lamda back office life and pension system, developed in the mid 1990s, to provide the core of its German proposition. “In Germany the flexibility of product design and the capability of offering group style schemes is important. We think Lamda is particularly suited to group scheme administration, calculation of commission and record-keeping.”
Meanwhile, as EFA has found, pan-European pensions administration is still a few years away. Edwards is optimistic, however. “There has been no European big bang but rather a steady evolution. We are gradually moving towards a common product. We are seeing it currently in stakeholder in the UK and we will see it in the rest of Europe.
“Fiscal regimes will define product design initially, but as the tax barriers come down the pan-European possibilities will increase.”
Pension fund advisers are the key, he adds. The hope is that eventually advisers will direct their clients to the most appropriate pension products wherever they may be found within Europe.