Central & Eastern Europe: It’s a tough old world
Polish second pillar pension funds are experiencing tough business conditions and restrictive legislation. Krystyna Krzyzak reports on how they are coping
For the last three years, Poland’s second pillar pension fund companies (PTEs) have been contending with increasingly tougher business conditions.
First, in 2010, came a cap on management fees, followed in 2011 by a scale-back in contributions. The portion of social security contributions to the second-pillar open funds (OFEs) was cut from 7.3% to 2.3%, with the remaining 5% moved to the social security fund ZUS. In 2013, the OFE portion rises to 2.8%. Given the temptation for governments across the region to utilise second pillar assets to reduce budget deficits, the Polish pension industry did at least get reassurances from finance minister Jacek Rostowski that there was no intention to freeze or even lower the allocation.
Obtaining new clients became trickier in 2012 following a ban on direct acquisitions, leaving the PTEs to pursue internet-based educational campaigns. The ban on acquisitions has had a dramatic impact on fund member transfers. According to data from the Polish Financial Supervision Authority (KNF), in the third quarter transfer session of 2012 the number switching funds was only 2,125 – 127,796 switched a year earlier. “This is positive legislation,” stresses Marcin Żółtek, board member and CIO of Aviva PTE “Before, we were losing 12,000-18,000 members each session to smaller aggressive funds. Following the ban the transfers dropped to 600, which shows the extent of agent activities.”
Smaller funds would not agree. “Direct acquisition used to play a substantial role in the growth of the portfolio of assets and fund members,” says Wojciech Rostworowski, vice president of the Board of PKO BP Bankowy PTE. “Between 2009 and 2011, we acquired over 140,000 members from other funds and over 30,000 new members on the primary market, which in total accounted for 40% of membership at the beginning of 2009.”
The Polish second pillar had, as of the end of October 2012, 15.9m members and assets of PLN254.7bn (€62bn). Of the 14 OFEs, the three largest – ING, Aviva and PZU Złota Jesień – have a combined share of 60% of total assets and 50% of members. Excessive market concentration has never appealed to the Polish authorities. New workplace entrants undecided on which fund to join are assigned by a ZUS-run lottery to a smaller fund, provided they meet performance criteria. In 2012, PKO BP Bankowy, for example, acquired 103,000 new clients through the lottery.
Pursuing new clients is no longer that attractive for the larger funds. Aviva stopped active acquisitions of new clients after management fees were capped in 2010. “It put larger funds such as ours in an uncompetitive position, so we stopped new acquisitions – and paying agents,” explains Żółtek. “Lower fees and lower transfers only worsen the situation.
Taking into account the cost of acquiring and servicing a new client, we calculate the breakeven point as 15 years. So we’re pushing to be part of the lottery system.”
Takeovers, also restricted to smaller funds, are another way to grow business. In the first consolidation since 2009, PKO BP Bankowy – the ninth biggest OFE – has put in preliminary offers for Polsat and Warta, the two smallest funds respectively. The timing of the Polsat deal is complicated by the fact that the fund has not met the minimum return – the three-year averaged return was less than half the average – so requiring the PTE to make up the difference from its capital.
Rostworowski told IPE that the Office of Competition and Consumer Protection, Poland’s anti-monopoly body, has approved the Polsat deal, and is awaiting for regulatory approval from the KNF.
Other changes in Polish legislation allowed the PTEs, as of 2012, to offer the newly created individual pension insurance accounts (IKZEs) via voluntary pension funds (DFEs). As of November 2012, eight PTEs had established DFEs. The take up for IKZEs, third-pillar vehicles with personal tax exemptions, and are also available from life insurers, brokerages and investment funds, has been modest, with only around 300,000 created, mainly through life insurance companies.
Grzegorz Chłopek, president of the board of ING PTE, supports the idea of higher retirement savings in third pillar schemes but acknowledges that interest in IKZEs is limited. “The product is not user-friendly because the tax advantages are not clear,” he notes. While IKZE contributions are deductable from personal tax, and their returns exempt from capital gains tax, it is not evident whether these will be more than offset in the distribution phase.
The one outstanding piece of missing legislation concerns payouts from the second pillar.
In 2014, the first significant tranche of second pillar members retires, and yet there is no law on how they will be paid, and by whom.
Four options for handling retirees’ second pillar funds, through annuities or programmed withdrawals, are currently under discussion:
• ZUS administers and pays out pensions via a newly created capital annuity fund. Part may be privately managed.
• The pensioner chooses from a range of retirement products, from providers such as life insurance companies, PTEs or investment funds.
• Private fund managers are selected by annual tender.
• The PTEs act as asset managers.
The pensions industry is concerned that the money will be moved to ZUS, possibly even for those some 10 years from retirement. The worst-case scenario for the pensions industry is that the second-pillar accounts are folded into the first pillar pay-as-you-go system, as happened in Hungary. The likelihood of this depends on the Polish economy. A slowdown would raise the budget deficit’s share of GDP and increase pressure on the authorities to use the second pillar funds to cover any first-pillar pensions shortfall. Such economic developments spurred the government in 2011 to reduce second-pillar contributions to 2.3%.
“Our industry believes that these monies should stay in the capital markets, but that the system is organised in the cheapest way, in other words via entities already present: life companies for annuities and/or pension companies for programmed withdrawals,” says Grzegorz Chłopek. “This needs to be settled by mid-2013, otherwise we will have problems implementing the payouts in our IT systems.”