A key characteristic of the relationship between pension funds, pension fund management companies and Portugal's major banks is that it appears to be very familial. Indeed, it could almost be called incestuous.
"A Portuguese pension fund needs to have a Portugal-based pension fund manager," says Rui Guerra at Mercer Investment Consulting in Lisbon. "This entity has the legal form of a pension fund management company, an SGFP, and it can then outsource the management of the pension funds to an asset manager."
Well, so far, so level playing field. Or perhaps not. "Most SGFPs are linked to a Portuguese financial group and that will generally also include a bank," adds Guerra.
"The bank will generally be undertaking the management of its own pension fund's assets," notes Bernie Thomas, senior consultant at Watson Wyatt in Lisbon. "Consequently, the general tendency is for an SGFP to turn to its own group's asset management arm." He adds: "Insurance companies can also undertake asset management, and major second pillar pension funds, like those for the telecoms sector, have similar organisations. They are profit-making organisations that charge market-related fees."
Nevertheless, banks play a key role in Portugal's pension industry. "Although there are something like 200,000 companies registered in Portugal only 1,000-2,000 have an occupational plan," says Thomas. "As a result, second-pillar schemes together have assets in the region of €15-16bn, or 10-12% of GDP. Of this, 50-60% belongs to the pension funds of banks, which have their own pensions structure - most bank employees do not belong to the state social security system and so their pensions in effect combine the first and second pillar. So true second-pillar pension plans that act as top-ups to the state pension have assets that amount to about €5bn."
In addition, banks don't have to go through an SGFP. "We are the asset manager for the pension fund of the Santander banking group employees, which has assets under management of €1.3bn," says Ricardo Lourenço, head of pension funds at Santander. "We also manage the pension funds of seven or eight companies but they are quite small. In the case of our bank there is no pension fund administration company between us but in the case of the other pension funds that come to us, there is." So what does this mean to the asset management industry?
"Still today an open Portuguese pension fund has to be approved by the local regulator and domiciled here and do the administration and reporting locally," says Leonardo Mathias, director general at Schroders in Lisbon. "So in practice foreign-based asset managers like Schroders are not allowed to provide their services directly to the plan sponsor. But foreign managers are allowed to provide sub-advisory services to the local managers. Although it may be considered an artificial barrier to entry, foreign asset managers like Schroders are frequently requested to give their advise on asset allocation, and in helping to find the best solutions to the plan sponsors become the plan's sub-advisers.""Foreign asset managers tend not to get mainstream business but rather provide specialist services," says Guerra.
"Most pension funds are too small for specialised mandates so we don't see a trend in that direction," says João Santos, head of institutional asset management at F&C Portugal. "The market is quite small so it's difficult to find any trends, but there is some migration from defined benefit towards defined contribution. But even here I don't see a major change in the requests from the asset management side. We don't work directly with the pension funds, our clients are the SGFPs, but we have been trying to respond to the needs of the pension funds by taking some ideas we have got on liability driven investments to the clients, trying to help them with new ideas, with new ways of managing a pension fund. However, we really don't see any major change in what our clients require from us."
But Guerra detects changes: "In the recent past we have seen clients demanding more from their investment manager because of the greater impact a pension fund has on the company sponsor given the availability of more sophisticated analysis and a greater participation by consultants in the market. And as a result of mergers there is greater competition, meaning that the traditional players need to provide a better service and new investment solutions to their clients. But having said that, the Portuguese asset management market is still dominated by domestic managers both for legal and cultural reasons."
So does that leave only a small amount of business to foreign players that have entered the market? "The only way I see for overseas players to come into the market is to have some sort of service provided to the local groups," says Santos. "I am currently speaking with the Millennium Fortis insurance and pension group which is a major player here. For the past couple of years Fortis has had a joint venture with BCP, which has about a 30% market share of pensions in Portugal. And we manage the assets for them."
"Some companies and SGFPs are considering opening the asset management to non-Portuguese companies," says Guerra. "There are different stages: one is that some companies want to change from DB to DC while some others may want to use external managers for some specific mandates." So what sort of portfolios are SGFPs looking for? "Recent years have not been particularly good, so there's a trend for clients to avoid risk," says Santos. "In fact Portugal has never been a very risk-taking market and the difficult markets of a few years ago has increased that trend. And when we became part of the Euro-zone a dependence on the Portuguese market virtually vanished."
"Asset allocation is very biased towards bonds, and to government bonds, with Portuguese bonds accounting for 5% of the total bond exposure," says Guerra.
"Correspondingly, the percentage of equities is relatively small when compared to other markets. And the exposure of Portuguese pension funds to Portuguese stocks has been less than 1% for the last five years, reflecting the real weight of the Portuguese stock exchange in the Euro-zone. So an overall portfolio breakdown would be up to 60% bonds and 30% equities and 5% property. And there has been a gradual increase in alternatives, 3-4% funds of hedge funds, up from zero three or four years ago. More important is that pension funds are defining the strategy that better fits what they want, with companies looking more at costs and asset/liability, whereas some years ago it was not an issue as most SGFPs provided some sort of balanced management."
"We don't see a trend to go for more risk," says Lourenço. "Our investments are focused in two main regions - Europe and North America - with small allocations to other areas. But we have seen diversification in terms of alternatives. We already have commodity-related products, hedge funds, real estate and VAR funds for all the pension funds we manage."