With the race on for German providers to corner as much of the new Riester pensions market as possible, products are hitting the market at an impressive rate.
Predictions of e330bn in extra assets over the next few years show there is much to play for.
Allianz Dresdner is one German giant that has its sights fixed on both the institutional and private retirement market – leveraging off its insurance/asset management background.
Patrick Bastian, senior manager for pensioninstividual at DIT, the asset management arm of Allianz Dresdner, explains how the group is priming its third-pillar business. “What we tried to do was to create a product which was not the same as an insurance product and with a very different asset allocation. We wanted to set up a Riester product with a high equity ratio, where we could say it is an addition to the typical insurance product.”
Following discussions with colleagues from the insurance and marketing sides of the business, Bastian says the group looked at existing Riester-type products available through Allianz Dresdner and worked from there to develop a new range of funds to meet the application of the new law.
“The result was that we decided to try for funds with several life stages and different equity ratios. We eventually came up with five different funds. Our competitors at the moment are mostly selling funds that they use for other subjects, but we built these funds especially for the Riester law.”
He goes on too explain how the new product differs from its predecessors. “The first important difference is that the capital guarantee concept within the fund is not with the fund itself. What we have is a contract with the client itself, so there are two sides of the contract. For each contract we guarantee that at the end of the paying in phase the money will be there.
“We had to look at this carefully, because the guarantee depends on how much people pay in to their fund. Within Riester there is not a classic guarantee fund where you have a three-month pay-in phase and then have a guarantee date in two to three or five years where a fund guarantees a certain amount. That is not how it is set up here.”
Bastian explains that the reason the firm set up five different funds was to switch allocation profiles depending on the age of the client.
“For example, one of our funds covers people born between the years 1977 and 1996, which includes youngsters who will come into employment in the next years. They will pay into the funds for the next 30 years or more, so we can make the asset allocation accordingly – say a 100% equity allocation over a long period and can guarantee this.”
He cites another fund – the 1947–52 profile – and notes that the equity ratio will be much lower: “It’s a question of putting people together with similar liability profiles.”
The catch in creating the new funds range, however, has been in reporting, according to Bastian: “In my opinion this has been the most difficult issue. Every person has a different payment behaviour, so one might start paying in, then stop for a year, for example, or change the amounts they pay in. You cannot say how each customer will pay in the contract period. We succeeded in finding a solution to this through our own risk controlling for the asset management division and that of the former Dresdner Bank. Allianz Dresdner believe the advantage in producing a new range of separate funds will be their ease to the customer.
“People know exactly when they were born and so they can look at the name of the fund and see exactly which fund is for them – they also don’t have to change this fund. It is easy and transparent for the customer to use these funds.
“The pay-in and pay-out comes from the same fund and we can change the asset allocation within the fund through the years.”
He adds that while the portfolio management team tries to hold the funds at the maximum equity level, it also has the discretion to reduce the equity ratio in bad market conditions and reduce equity exposure before the fund pays out.
The set-up, he believes, is unique in the German market. “I know of two other investment companies that have similar ideas on capital guarantees, but they do this with separate funds and combine them. We believe that you cannot combine two or more funds on a daily basis, you should have to change the asset allocation ratios between these two funds every day – we can change this in one fund. As a result we are closer to the market and believe we get a higher equity ratio over time.”
In terms of costs (not regulated by the government) Allianz Dresdner charges a management fee of 1% for the 1947–52 fund; the others are priced at 1.25%.
“Another additional factor is that we also offer to guarantee more than the state stipulates. The government says that by 2008, providers must guarantee a maximum of e2,100 per client. However, we allow our clients to pay in five times this amount by 2008 guaranteed. For us it is the same guarantee whether it is e2,100 or e10,000."
Since the product gained approval in April–May, Bastian says business has been steady but not spectacular. “I think this will pick up after the summer. The press in Germay has advised people to wait until all the products, including occupational funds were on the market.
“We believe that the third-pillar product, however, is transparent and has its market.”
Christoph John, spokesperson for Allianz Life – the side of the business focusing on second-pillar pension provision – says the firm’s main target has been to put in place an offer the whole raft of the five German pension financing methods. “At the beginning of May we completed our smorgasbord with the acceptance of our pensionsfond vehicle by the regulator BAFin. It is now possible for us to give advice to our clients without a bias towards any particular vehicle and we hope this approach will be successful.”
John believes that Allianz’s strength is in ”differentiation” from its competitors by combining the group’s strength in asset management and insurance company liability management: “We are convinced that our Pensionsfond product is cutting edge and a little ahead of the market.
“The Pensionsfonds of our competitors, we believe, are simple fund-linked insurance products - offered to each employee. This means there are many contracts under an umbrella called a pensionsfond – but it is in fact like a Pensionskasse.
“At Allianz we looked at how we could get efficient asset/liability management. What we came up with is a system where our asset managers don’t just look at the guarantees but they look at the risk profile of the whole pool of employees under contract.
“This influences decisions on the investment side and means we can add some flavour by increasing equity allocations and seeking good performance. Given the same risks we hope we can get better returns.”
The new Pensionsfond legislation allows that the guarantee can be shown collectively, although Bastian says he has yet to see competitors going down the same route.
Discussing the current trends for employee selection of funds, John notes that Allianz started its Pensionskasse in November and has seen good business going this way from small and medium-sized companies.
Bigger companies, he says, seem to be waiting to look at the Pensionsfond market in depth before taking any decisions, although Allianz has enjoyed a couple of notable contract wins for the MetallRente industry-wide scheme and for the Deutsche Telekom scheme.
“It is the middle of the year and companies appear to be taking advice but not taking decisions yet. Also, it is just a short time since the latest legislation change. The market is certainly very open and there doesn’t seem to be any one product that is moving the market.”
The question within an organisation like Allianz Dresdner whether it sees the second or third pillar as its primary business goal.
John believes both are necessary targets. “I think we have a clear perception of what is going on in Germany. The Riester reform was directed largely to the third pillar and we advise that people should organise their grants and tax reforms through the third pillar to fill gaps that they will find in the public pensions system in the coming years. The third pillar is good for filling these new gaps, but overall it is not enough. It’s not a question of third or second pillar, it’s a question of finding very cheap and efficient ways to cover retirement. It’s not either or, it’s a combination and one that is very dependent on personal circumstances.”
John believes the big success of the Riester reform is that, for the first time, the government conceded that it could not maintain the high level of public pensions.
“The second important factor was that for the first time there were very broad incentives given to the people to start looking after their old age. It’s a very important step and it is good that the government has done this. People are reluctant to save and there are debates about whether the system is too complicated, but people will save if the government supports its own reforms a bit more than it has done so far. I believe that this will happen in the second half of this year.”