Insurers across Europe are positioning themselves to pick up a share of the growing business of managing defined contribution plans. As defined contribution (DC) pension plans progress across Europe, the question of whether insurance companies will be best placed to manage such schemes is stoking debate.
Johann Heymanns, managing consultant at Watson Wyatt in Brussels, says the issue is pertinent in Belgium where DC is becoming the pensions product of choice for many firms. “We are working on these issues for insurance companies which are all adopting more investment flexibility including mixed funds or ranges of five or six mutual funds with guaranteed interest portions. This gives choice to participants and to companies as clients. It is how they are looking to compete.”
He adds that the DC concept has always existed in Belgium, but that a new pensions law recently introduced US-style cash balance plans. However, he notes this means pension funds can introduce cash balance plans, as long as the guarantees are based on objective criteria.
And he points out that the debate in Belgium on tax deductibility between insurers and occupational schemes is ongoing. “Insurers still have certain advantages. For administration purposes, if you are a small company it is difficult to implement these plans with an investment manager. Another advantage is that some people still prefer the guaranteed interest rate. With an external manager it is more difficult to get this. The downside is that you can’t choose your investment manager or have specific mandates – so by definition what you get is almost a global mandate.”
Another potential threat to insurers comes from administrators, he says: “In Belgium there are no real stand-alone administration bodies, but I’m sure they will be created. The new industry sector funds will also be competition.”
Ben Kramer, senior relationship manager at Amsterdam-based custodian Kas-Associatie, comments: “Some Dutch investment managers are opening DC plans to third- party investment funds due to demand. I’m not sure about insurance companies though, because their business is mainly unit-linked built-in guarantees – so the whole structure is built around that.”
With this in mind, he says, investment managers could outsource administration and compete with insurance companies: “You do see outsourcing to a custodian or a specialist party because they want to focus on the investment side.”
He notes that investment managers started providing DC around five years ago at the behest of multinationals, but adds that “all kinds of companies” are looking to DC structures today. “Insurance companies will have to deal with this. There are a lot of insurance contracts of 10–20 years which are running out now. The question is what companies do then. Many already have discretionary mandates and will develop DC structures on top, so it will be quite difficult for the insurance companies to get in.” For the large Dutch financial groups like Fortis and ING the debate is academic, however, he points out.
Neil Macpherson, director of global retirement services Europe at Citibank in London, says in much of Europe an insurance wrapper/structure is needed for DC fund offerings. “In the UK, for example, the rolling up of dividend income is only possible through insurance structures. And in Holland, Germany and Scandinavia long-term savings products have traditionally been insurance products. There does seem to be a move away from this model, however, with the new IPA Individual Pension_Account product in the UK.”
Administration and performance, he says, are the key issues. “This can be good and bad for insurers. The real debate is whether insurers can perform as well as specialist investment managers, and alternatively whether investment managers can deliver the structure necessary for such large undertakings. The internet may be a key factor here further down the line.”
He adds that investment banks are manoeuvring themselves into competitive positions. “Schroders’ purchase of Liberty Pensions in the UK is an indicator that investment managers want to have the option of providing a fully bundled pension plan.”
Nonetheless, Macpherson is sure insurers can hold their own. “They have the brand name, administration, marketing capacity and budget. I would be surprised, for example, if the insurance companies don’t dominate stakeholder pensions in the UK.”
Mike Wadsworth, a partner at Watson Wyatt in the UK, comments: “The really technical DC debate is happening in the UK at the moment with stakeholder and IPAs as alternatives to insurance structures.” Issues that insurers should be considering, he says, include offering annuity-type/post-retirement benefits, which cannot be achieved through IPAs.
The importance of these developments, he adds, is that providers are absorbing the information with a view to future strategy. “The Australian experience, for example, is that very few administrators will survive in a stakeholder-type DC market. Only large players will remain, due to economies of scale in a market of small margins.”
Stakeholder, he says has shifted the UK DC goalposts. “I think before stakeholder the market was heading towards large employers with unbundled company structured schemes and the remainder with group personal pension plans. The bundled insured DC schemes were getting a declining share of sales because they fell between two stools.” But he points out that UK insurance groups now offer third-party fund ranges. “One of the best-kept secrets is that there are now over 20 life companies that outsource significant parts of their fund management (see page 19). The reason is that independent financial adviser (IFA) distributors are insisting on fund manager choice through insurance groups. If you actually look at the structure in a lot of insurance companies, the fund management operation is a separate company – the argument being that they need to compete with the fund management houses in the City. The flip side is that it allows companies to choose – or not – their in-house product more easily.”
Henry Karsten, director at William M Mercer in Madrid, says the legal change for Spanish corporates to transfer pension assets from balance sheets to funded arrangements by January 2001 is a business opportunity for insurers. “On the first level companies will choose between a qualified plan and an insurance contract. Firstly, non-qualified plans are always insurance plans and qualified plans are the Spanish equivalent of the UK exempt approved pension plan – where insurance companies can operate. Secondly, the insurance companies have experience in managing employee benefits.”
However, Karsten points out that Spain’s banks and financial groups have insurance subsidiaries as well as specialist investment manager – giving them the “best of both worlds”.
Sten Kottmeier, head of the funds operation at Stockholm-based AMF group in Sweden, notes that increasing numbers of life insurance companies are turning from DB products to DC. Kottmeier says AMF – solely responsible for the supplementary pensions of blue-collar workers until 1996 – turned three years ago to the DC market. “Now we are working totally free, which means we can look at other fields. We have an advantage as we have very low operating costs and good performance and of course these are the two essential elements for this kind of company. It is a competitive market and the new premium pensions system (PPM) will continue this.”
Guido Best, head of the international activities department at Bonn-based insurance company Deutsche Herold Leben, says the company has traditionally managed DC-type contracts through pooled arrangements. “This is the easiest route, because the company has nothing to do with administration or contracts, all they have to is deduct the amount from the salary and they can save taxes and social security payments from these premiums.”
Competition, he says, is intense from German banks and investment managers, but he notes tax allowances give insurers an advantage. “Since this premium is taken from the salary it is only taxed at 20% and not the marginal tax rate. Furthermore, insurance companies can tackle the second pillar market through either the direct insurance, reinsurance support fund or Pensionskasse routes.”
And he feels the insurers have the upper hand going forward. “AS funds, for example, have no tax advantages. Some are being set up, but they are not as important as people thought they would be at the beginning.”
Urs Barmitlau, an actuary with Zurich-based consultant Allvisa – says insurance companies in Switzerland carry out investment and administration for most small pension plans. “Over 100 employees, however, you tend to see separate funds with reinsurance contracts.”
He adds that the insurers have stiff competition from large multi-employer funds and consultants in funds of up to 2,000 people, which tend to go for a global outsourcing approach with investment consulting provision. “The insurance companies are not so well known for good returns and companies with 100–300 employees start to create separate funds. It depends on the insurance company, but some are giving up to 5% returns, while multi-employer schemes offer a 5.5% guarantee and separate funds produce 12–13% returns.”
Barmitlau says insurance companies are now offering better products such as mixed funds with different equity levels, but adds: “The problem with these products is that the employer has to give some kind of guarantee and if there is not a sufficient return for the fund through the insurance company then they have to pay the difference.”
On the European level Alistair Morrison, chief executive officer at Deutsche Asset Management Life and Pensions in London, feels there is little to choose between different financial platforms. And, coming from a group with both insurance and asset management arms, he says he is “agnostic” about the future DC vehicle of choice. “I don’t know if across every single jurisdiction it could be said that insurers have any particular advantages. One question is whether it is going to be possible in Europe to promote a single range of funds in every market – particularly if you’re talking about rather esoteric products.
“It is still difficult to get a European vehicle across the united states of Europe – but there are products around that are building towards this. You need to get the benchmark, pricing, valuation and regulatory positions right for each market though.”
And he flags up the reality that underpins much of the pursuit of new business – DC or not. “Mandates still tend to be quite relationship-based and business tends to be channelled through existing groups, so you need to be strong across the board.” IPE