Changing investment attitudes and habits is not an easy task, especially within a short time frame of six months. But with innovation, courage and a bit of risk-taking, the Premium Mandatory Pension Fund of Hungary has achieved the near-impossible.
This young fund has won the Central European award for its work in offering growth portfolios of equities and alternative investments for pension fund members - a pioneering step for Hungary.
Furthermore, it has revolutionised Hungarian pensions regulation, prompting a new law that requires compulsory pension funds to offer three types of portfolio, with different risk profiles.
Premium is a defined contribution fund that forms part of the compulsory second pillar of the Hungarian pension system. Members' contributions consist of an automatic 8% deduction from their salaries each month. But this presents something of a barrier to cultivating an interest in investment among the working population in Hungary.
Contributions are perceived almost as a tax, which benefits individuals only indirectly, and only in the long run.
So the concept of using these contributions to actively grow an individual pension pot over time is rather alien to the public as a whole.
This is only a reflection of historic attitudes towards money in Hungary as a whole. In general, the nation's investment culture lags not only behind the Anglo-Saxon countries, but also behind other central and eastern European countries such as Poland and the Czech Republic. A good indication of how old-fashioned saving habits actually are in Hungary is that only 2-5% of all private savings are invested in equities.
As a result, most young professionals in Hungary are quite risk-averse when investing their savings. All compulsory pension funds have therefore adopted a very conservative investment policy, resulting in an average fixed income weighting in their portfolios of over 75%.
However, a small but growing number of Hungarians in their twenties and thirties have
a different outlook on pensions as an investment concept. Unlike their peers, they are conscious of the long-term financial consequences of the decisions they make today about their pension funds.
They are aware that on an investment horizon of 20 years, higher risk is well compensated for by a higher rate of return. Over a timescale of many years, even a small but consistent difference in annual returns can result in a massive gap in value between the assets of those who stuck to so-called ‘safe' investments, and those who chose ‘managed risk' portfolios.
When Premium was set up early last year, it was realised that there was already a mismatch between the asset side and the planned liability side of the fund. Premium therefore decided to offer members a serious alternative to the ultra-conservative investment policies of its competitors.
So on its launch in April 2006, it offered potential members some new investment options for their funds. It provided a more ambitious risk/reward profile, with an overweight equity segment ranging from 40% to 70%, although the maximum was dependent on favourable market conditions. In addition, it would be possible for members to invest in alternative products such as target and total return funds, hedge funds and private equity.
Finally, members would be able to hold a much higher proportion of international assets in their portfolios than was the case for existing pension funds in Hungary. At present, over 85% of the portfolios of most Hungarian pension funds are invested in Hungarian assets.
INTO THE UNKNOWN
At this stage, the fund was venturing into unknown territory, and no-one had any idea how popular - if at all - these ideas would prove to be. So the fund's launch was a very low-profile affair. The budget for marketing and communicating the plans to members was kept to a minuscule €40,000. This was just enough for a very short campaign - mostly online - and for a low-key press conference.
However, these fresh new investment policies were an instant success, and attracted many more customers than the pension fund's managers had dared hope for. The result is that the fund now has 21,800 members and €13m-worth of assets.
This, however, has been only the start of the fund's achievements. When creating the fund was first contemplated, all its managers had in mind was to cater for a niche market segment - a target which has been achieved much more quickly than originally expected.
But the sheer existence and rapid success of the fund has led to a much wider development - a revolutionary change in Hungarian pension fund regulations.
New rules now require that from 1 January 2009, all compulsory pension funds in Hungary will have to offer three portfolios corresponding to three different risk profiles: conservative, balanced and growth. Those members who do not make an active choice will be automatically placed in one of the portfolios, according to the time left until their retirement.
For the overwhelming majority of members of compulsory funds, the average period over which contributions will be made is well over 10 years, So most of their assets will be invested in the riskier growth instruments. This will bring about a fundamental change in the entire capital market landscape of Hungary.
Premium believes that this change in the law will leave an entire generation better off than it would otherwise have been.