In a recent article Luc Freidan, the minister of finance, budget and justice, emphasised how important pension funds will be for the Grand Duchy. Asked what mechanisms are to guarantee reliability, Freidan stressed that most large, international banks and financial institutions are already based in the country. This is a valid point for if the pension fund industry does take off as most are predicting, Luxembourg needs to be able to service and administer the schemes. At the moment its ability to do so is relatively patchy.
There are areas where Luxembourg needs little development. For example, pension schemes are in some aspects similar to investment funds and the 200 or so banks providing custody and clearing for the country’s funds will service them with ease. In other ways administering pensions is a more delicate, long-term and complicated process, a process that Luxembourg is at present unable to provide. So, like the ASSEPs and SEPCAVs themselves, the country has a sound foundation that it can (and will need to) build on. Says Françoise Barthel of Banque de Luxembourg: “What is important is that investment fund administrators get prepared for the pensions funds so that they are able to cope with this structure in the future…the investment fund administrators are unable to administer defined benefit schemes and, in this respect, there is a lot of work to be done.”
Christophe Girondel, senior consultant with Deloitte Consulting, says the investment fund and distribution network infrastructure is equally relevant and can be applied to the pension funds. “If you look at what has happened in the UK in the DC market, the record keepers and the software providers are just the same that you have in the investment fund market,” he says. There are admittedly certain areas where Luxembourg scores well. If you break administration into two parts- administrating the assets and administrating the fund- reporting, performance measurement, member access and so on, it is ready for the former, and not the latter. Says Ikram Shakir, managing director of consultants Barnett Waddingham, on investment administration: “I’d be very surprised if asset managers cannot cater for this kind of service. It won’t require too much for them to have sufficient skills and systems in place.” Those banks providing custody and clearing for the funds will service the funds with ease.
Where Luxembourg is lacking is in administering pension fund information. And here there are two problems: how to run thousands of individual accounts and how to provide information to the pension scheme members. Employee and employer contributions and changes in these have to be monitored. People retire or leave the company and someone needs to oversee these moves. Investment managers are not doing this and the service is as good as non-existent. The closest you come to it is insurance companies who are providing a similar service at the moment albeit for individual policies opposed to groups. And so the pensions business requires a different type of administration compared with the life insurance business.
Mervyn Martins, a partner at PricewaterhouseCoopers, elaborates: “Asset managers are going to have to run lots of individual accounts, similar to what insurance companies have for unit linked products.” At the moment administrators don’t have the wherewithal to run these single accounts. They can run a SICAV with a sub-fund or an investment fund but the entity is treated as a collective vehicle and individual records are held at the transfer agent. “However, in the pension fund clearly you have your dedicated pension so for every participant they have to open a new account which is what you would do in a unit-linked policy,” he says.
In theory the unit-linked capability that insurance companies have should be sufficient to run a simple pension fund but insurance companies lack the transition agency side. Promoters or investment managers have the TA capability, what they lack is the ability to run thousands of individual accounts as you cannot run an omnibus account on a pension fund. In other words, in Luxembourg, most players can offer something, few, if any, everything.
One of the groups that is prepared and will benefit enormously from the new pension funds are transfer agents, the troops processing transactions and running the so-called headcount. If you’re buying a fund, a transfer agent is the person at the end of the chain transforming the order into a precise transaction. Not the sexiest job perhaps but nonetheless an essential part of servicing pension funds. Luxembourg has a number of prominent players including EFA, FETA, BIL and Chase/JP Morgan.
John Pauly, managing director of FETA, one of the country’s best known transfer agents acknowledges pension funds will require plenty of servicing. “There’s a need for traditional money management. There’s a need for valuation, performance allocation and similar administrative activities. There’s also a need for custody and for insurance,” he says.
Take a pillar II, DC, company-sponsored pension fund where employees have some say on their investments, as an example. The first thing the company needs to give employees is a place to call for information on their current balance and whether they want to redirect some of their investments. If this place is internal, it will typically go to human resources. But having 5,000 employees calling once or twice a week to get an update, is another matter. This is the kind of operation outsourced to the likes of FETA.
“This is the reason why this service is something that is part of our strategic development plan. We are aware that today we are not in a 401k type of DC world but we are convinced we are going to get there and sooner rather than later,” he says. Whenever you have a pension fund there’s a need for someone to count the heads, someone to produce the reporting for the workforce and someone to do the fiscal reporting, “This is something we are doing today. Not in the direction of pension funds but more investment products but ultimately the function is exactly the same,” says Pauly.
Transfer agency is an IT intensive business with a great degree of automation. Once the IT systems are in place, they normally have plenty of spare capacity built in- not least because they are excruciatingly expensive to replace. Thomas Seale, the chief executive of EFA, says the group has invested over E20m in IT and that it will need upgrading every three to four years. FETA have invested heavily in IT and, along with the other large providers, has sufficient slack to service this new business. Luxembourg has sufficient transfer agents.
Supplying information for scheme members and providing the ability to manage single accounts, these are the areas where Luxembourg is left wanting. And if ASSEPs and SEPCAVs are as successful as people are predicting, Luxembourg is a formidable, untapped market. “I don’t know whether the big pension fund administrators realise the potential and, at the moment, I have seen no evidence that they are considering offering anything to Luxembourg,” says Shakir.
At present there are no Bacon&Woodrows and Watson Wyatts but they are likely to enter the market once it takes off. There are a couple of outfits investing heavily in a bid to build the whole package and run individual accounts, the most prominent being ABN Amro, and in time there will be others. As one local player sums it up succinctly: “where there’s money, the service providers will come”. Luxembourg needs them.