IPE asked three pension services - in France, Italy and Romania - the same question: ‘What challenges and opportunities will you face in 2008?' Here are their answers:
Alessandro Stori, director at Fondenergia, the Italian pension fund for oil sector workers, which has AUM of €600m
This will be a year of consolidation for Fondenergia. With around 42,000 members we already have one of the highest participation rates of Italian pension funds together with Fopen, the pension fund for employees of the electricity utility Enel. Our target for this year is to reach 45,000 members, which would mean a participation rate of 95%.
For the Italian pensions industry as a whole we expect the biggest change to be on the asset management side as a result of the implementation in mid-year of a new law that will introduce a more comprehensive approach to risk.
Currently, under a decree from 1996, we have to comply with investment limits for single asset classes in order to mitigate risk, but the new law will consider the final risk level of a whole portfolio.
We are preparing ourselves for the changes by researching how the new investment rules could reduce the risk and volatility of the fund while maintaining the same levels of return. And we would like to increase the diversification of our portfolio by introducing alternative asset classes, which is currently severely restricted, as well as different sources of alpha and specialised mandates.
But volatility is not all bad. The market volatility between 2000 and 2003 coincided with the beginning of our fund and it was a great opportunity for us to learn how to deal with it.
The reform last year that attempted to use severance pay reserves, known as the trattamento di fine rapporto or TFR, to boost the country's pension system, had only a limited impact on us due to the already high level of participation in our fund and the limited number of so-called silent members, that is those that refused to make a decision on whether to leave the TFR payments with their employer rather than let it go to a pension fund.
Nevertheless, the TFR helped us to raise our inflow in the first 11 months of last year to just under €120m from €78m for the whole of 2006 and we expect contributions of €150m for this year. It also lifted the number of our members to 42,000 from 35,000 and raised the participation rate to 90% from 75%. This is a satisfactory result considering we only started 10 years ago.
But in 2008 the TFR will be mainly of major importance for those Italian pension funds with lower participation rates that cover sectors where workers are spread across a large number of firms.
In terms of asset allocation I expect other pension funds will, like us, focus on sources of uncorrelated risk.
Crinu Andanut, director of private and voluntary pension funds management company SC Allianz-Tiriac, which began sales last year and at end-2007 had AUM of around RON3.5m (€993,000)
The New Year presents challenges to both second (mandatory) and third (voluntary) pillar pension funds in Romania.
The initial phase of adhesion to the second pillar ends on 17 January. It is mandatory for people up to 35 years of age but will remain optional for people between 35 and 45.
But even more important is the collection of second pillar contributions, which is expected to start in April or May. This is the first time in Romania's history that the National House of Pensions, part of the labour ministry, will split the pension contribution of the participants to the second pillar and send a portion - initially the equivalent of 2% of gross salaries - to private sector pension funds for administration. This contribution will rise over the next eight years to 6%, equalling an annual 0.5% growth, starting on 1 January of each year.
So far, progress in the second pillar has exceeded expectations, with 2.6m people having already opted to pay into the second pillar from 1 December 2007, despite this requiring a change in their mentality.
The New Year marked the start of corporate sales of pillar three because last year, when we began offering a third pillar product, companies had no budget to offer this to their employees. But as they have now made such allocations in their 2008 budgets I predict the voluntary pension system will grow substantially faster this year than last. I also expect more voluntary pension funds to be launched this year.
On the legal side, a guarantee fund for both pillars is to be established and a transfer norm for the second pillar, allowing switching from one fund to another, will also come into force, which does not allow brokers' interests to be promoted ahead of those of the clients.
We learnt last year that volume is the key issue in pension systems because it gives more flexibility with regard to investments, and that in turn can lead to good returns. So we will continue to focus on market share although we are already ranked second in numbers of second pillar members - around 800,000 from direct sales and 200,000 from the pensions lottery - and are the market leader in the third pillar with regards to the number of participants.
That the Romanian private pension system is still in its early days, with relatively low volumes, places constraints on portfolio diversification, and the law limits our exposure to riskier asset classes. However, on a positive note, our contribution flows provide us with a constant stream of funds to be invested, and this allows for adjustments to the average acquisition price of individual securities, which in turn is a good way to reduce the impact of market volatility. Another way is to target primarily blue chip securities, generally known for their lower price volatility.
We are legally required to report our unit value price in the national currency, the leu, which makes it the natural currency choice for investments despite the fact that the range of leu- denominated securities is very limited. That also limits asset allocation shifts and we do not expect any major improvements in the near future.
In fact we also expect our competitors to bet heavily on the leu and to go with the markets, adjusting asset allocation mostly via new inflows.
Jean-Louis Nakamura, CEO at the French public service supplementary pension scheme ERAFP, which has AUM of €4.7bn
Our main challenge for this year is to succeed in the first stage of our portfolio diversification, hopefully before the end of the summer.
Currently we are poorly diversified, with a bond exposure of 85% and an equity exposure of 15%. But with a change in our investment regulations in 2008, we have decided to increase our allocation to equities to 25%, mainly international, and to introduce credit bonds of up to 20% of our asset allocation.
We will launch the diversification via the tendering of new mandates and expect to be in a position to implement it in the second part of the year. And after 2008 we plan to introduce alternatives such as hedge funds, private equity, real estate and commodities to further improve our portfolio's diversification.
This year will also see the Rendezvous with Pensions, a system of negotiation between the government and its social partners on the pensions issue. They will discuss the balance of the PAYG first pillar pension scheme for private workers and a reform of the public workers' pension scheme. I expect the reform to result in a broad change of regulation for the public workers' pensions scheme.
And we hope that with this reform, the ceiling of contributions - currently 20% of the main package of public civil servant workers - to be raised or even abolished.
The Rendezvous with Pensions will also see a major reshuffle of all the regulations related to different pension schemes. As a result we will try to gain government approval for our own changes, which is necessary because the government decree which governs how we operate would have to be amended. Some of the changes are related to the administrative and some to the financial management of our four-year-old fund, in other words the introduction of new asset classes by 2009.
Volatility is not much of a concern for us at the moment because we have a very long duration, until 2035, so we are still at the start of our reserves building. We received €1.6bn in contributions in 2007 and currently only pay out €60m in pensions so as a result of this gap we can cope with volatility much more easily than funds that are not in such a fortunate position.