Face of sector to continue changing

Petr Benes, CEO and chairman at CSOB Pension Fund Stabilita, which has AUM of CZK16bn (€571m)

"We expect another good year, with a large number of new clients. In the Czech Republic we have a first pillar PAYG system and voluntary third pillar funds like CSOB Pension Fund Stabilita but as yet no second pillar funds.

"And a pension reform to introduce a second pillar is unlikely to take place soon. But as people are aware of population ageing, they view third pillar pension funds as an appropriate solution.

"I would also like to see further discussion about a possible reform in 2007 because pension funds are ready to provide the institutional background.

"In the corporate field, we are merging our four pension funds into two or three. Hornicky PF, with 19,000 clients and CZK1.1bn in assets, will be merged with CSOB PF Progres by the end of the year. Our latest acquisition, Zemsky PF, with 14,000 clients and CZK550m of assets that we acquired in 2005, may be merged with Progres too. Our growing assets will be reinvested at slightly higher yields because we believe a small gradual rise in interest rates will take place this year. Our portfolio is different from those of our competitors because we are actively seeking out new asset classes.

"In addition, we want to enter into new asset classes such as real estate, because real estate mutual funds denominated in Czech koruny will be issued next year. We will also be looking for other structures linked to real estate.

"Pension fund products in the Czech Republic are very formalised and limited strictly by law. That's why it is difficult to come up with a new approach to asset management every year. But we expect some new approaches in the area of pension fund sales - such as bundling with other products, for example building society and credit cards, and other cross-selling activities to attract new people in the most efficient way.

"With portfolio management, we expect that most of our competitors will continue going abroad to seek a better risk-return profile, structured products and new asset classes. We will do the same but on top of that, we plan to be involved in real estate either directly or indirectly.

"We do not expect radical changes to the Czech legislation or to the regulatory environment this year although it is by no means perfect. Nevertheless, we need a considerable number of amendments because, for example, we cannot offer clients various investment profiles.

"However, the current political situation, where as a result of parliamentary mathematics we are governed by a caretaker administration lacking a parliamentary majority and which failed to gain a vote of confidence, means that the possibility of political instability will not allow any changes to happen on a large scale."


Philip Menco, CEO at De Eendragt Pensioen NV which has AUM of €960m

"The major challenge in the new year is going to be the new Dutch pension law, which came into effect on 1 January and replaces 50-year-old legislation. The new law will have far-reaching consequences for the Dutch pension industry in terms of investment and communication with clients.

"It will affect us in both aspects, but because we changed from being a pension fund into an insurance company in 2006 we
are in a slightly different situation. We are already applying the new law's investment requirements and so it is the new communication aspects that present a challenge.

"The law sets out detailed rules on how to communicate with clients, what words should be used and what they should be told about indexation (compensation for inflation). We have to be very cautious about every aspect of communication, even in publications and on websites.

"Many of our colleagues are not yet ready to apply the new investment policy rules. Generally, although the medium-sized funds are prepared the smaller and larger ones, such as ABP, are not. But the supervisor, the Dutch central bank, will more or less force them to apply the rules.

"However, it is going to be a challenge to combine compliance with the new investment rules and a decent return. The central issue of the law is that liabilities are now marked-to-market instead of being discounted at a 4% interest rate. That has two consequences. First, you need to match your duration, which leaves less room for returns. Second, you have to take into account a buffer that depends on your asset allocation. The larger the duration gap, the larger the buffer should be. But one way or another you are limited in your investment returns.

"In addition to the pension law, we are expecting further legislation to smooth the transfer from the old regime to the new. But how quickly this is introduced will depend on when we get a new government following the inconclusive result of November's general election. I don't expect to see a new administration before March or April. In addition, there will be an election for the Senate in March. Consequently, any new law, in particular legislation that will provoke a reaction from the financial industry or the pensions world, will take time.

"The new international accounting standards IAS19 have implications for companies and sponsors rather than for pension funds directly. But there is huge pressure on most corporate pension funds to change from defined benefit plans to a defined contribution or collective defined contribution system.

"I expect many more pension funds will switch to a DC scheme in 2007 but I don't expect many will follow our lead and change into an insurance company. An insurance company needs sufficient equity to guarantee a solvency ratio of at least 5% of your liabilities. Moreover, it requires a fitting pension administration and sufficient risk systems. De Eendragt enjoyed a coverage ratio of over 150% and an administration that was organised on behalf of a whole range of different sponsors."


Pedro Fonte Santa, head of the financial markets unit at Banco de Portugal Fundo de Pensoes, which has AUM of €1bn

"We do not expect any changes in the New Year since we are well funded - at 97% or 98% - and our balance sheet is immunised, more or less through liability matching bonds.

"So we don't expect to have any problems. In addition, we are not concerned about a change of interest rates. However I expect interest rates to go up slightly at the beginning of the year, but then drop again after the middle of the year.

"Because we are a closed pension fund for the employees of the Bank of Portugal, the central bank, we cannot expand any more and take on new members. And we don't expect any changes to legislation or with the government.

"As we are segregated from Portuguese social security and the Bank of Portugal's employees will be guaranteed a pension through us, any future pension reforms will not affect us. The introduction of proper second pillar pension funds like in the rest of Europe has been discussed but I don't expect it to happen any time soon.

"Generally the problem for other Portuguese pension funds is that they are not immunised. They care mainly about the asset part of the balance sheet and to a lesser extent about the liabilities. In the past, legislation allowed other Portuguese pension funds to invest more freely. And they preferred to sacrifice expensive immunisation for investment in riskier assets. We would like to see more information-linked securities issuers because we have around 70-80% of our portfolio invested in those assets, and there is a scarcity of issuers. We have only three or four issuers in the Euro-zone, which is not enough for us because we would like to diversify our portfolio further. But we will stay within the Euro-zone because the issuers of European inflation products are based there. And one of our liability drivers is inflation. But our diversification, which will be good for our pension fund, depends on the will of the new issuers.

"We already invest in real estate. However, portfolio investment in alternatives such commodities will not be on the agenda in the near future although we never completely close the door to anything.

"Since we are well funded, the implementation of accounting standards regulation IAS19 did not affect us very much because we were already aware of the need to be immunised and to have a discount rate according to market rate.

"For our competitors, however, this could be a problem. We are only looking for minor adjustments to our portfolio and a slight redistribution of our exposure. We will probably be looking at fewer equities - we invest in equities and bonds - and more information-linked securities but nothing too dramatic to protect us against a possible bearish stock market. With central banks raising interest rates there might be a stock market correction in 2007. But we don't intend to change our current asset split.

"We invest and will continue to invest 75-78% in fixed income, 6-7% in equities and the remainder in real estate.

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