Wednesday, August 27, 2008

Romania: Pensions in Third Gear

Oxford Business Group Latest Briefing

For players in the Romanian insurance sector, this year's first six months have been characterised by a fierce battle for market share in the arena of private pensions. The main scuffle took place in attracting clients for the mandatory pensions - the so-called second pillar system -and is now moving into the offerings of voluntary "third pillar" pension plans.

The sales window for second pillar subscriptions lasted from September 2007 until mid-January. A total of over 4.1m Romanian workers aged between 18 and 35 either registered or were assigned to one of 18 licensed pension funds. The deadline for first contributions was May 20. Four players threw in the towel before the deadline, citing marginal subscription rates, leaving only 14 players in the market after various adjustments due to a high number of void contracts - 21.5% of all agreements signed - as well aas delays in corporate contributions. Here is the ranking of the top five players in terms of client numbers:

ING's Fond de Pensii - the Romanian arm of the financial conglomerate ING - led the pack with 33.16%, followed by the German-Romanian partnership Allianz-Tiriac Asigurari with 25.63%. In third place came domestic player Generali Fond de Pensii with 9.40%, closely followed by the local arm of British-based insurance multinational Aviva (Aviva Fond de Pensii) with 7.37%. The fifth spot was taken up by Eureko Group's domestic arm, Interamerican Romania, capturing 6.36%. The rest of the market is divided between nine more players, of which four hold market shares under 1%. Industry insiders expect these, and possibly a fifth player holding 1.53%, will be taken over by the end of the year.

Frans van der Ent, CEO of Interamerican Romania, told OBG, "with the main five players owning over 80% of the market and low transfers expected due to the nature of pensions and procedure, the second pillar market is now focused on consolidation." Van der Ent estimates a growth rate of 120,000 to 150,000 participants per year, but as he said, "the challenge is to find these people and then to justify the acquisition cost due to new commission charged by sales agents and brokers."

For many players, the focus has now shifted to third pillar products. Companies who have been predominantly looking at securing ground in the second pillar sector are now looking to expand their base into voluntary pension plans. Among the contenders are dominant pension companies ING, Allianz-Tiriac and Aviva, who launched products as early as last year and are now boosting their sales and broker networks to secure market share. In mid-July, Interamerican applied to license two optional pension schemes with intentions to enter the market within a matter of weeks.

Industry insiders foresee good prospects for various other banks, such as Romanian Commercial Bank (BCR) and French-controlled Romanian bank BRD, who are also looking to get a share of the third pillar market. It is thought the banks are in a good position to cut acquisition costs as they can avoid pricey broker fees by directly targeting the clients who fit third pillar profile: young, wealthy individuals who can afford to put away extra money. Furthermore, as the insiders claim, they have the relationships in place, which gives them a head start to win customers.

As the third pillar market is not campaign-based, the fight for market share will not be as heated as for the second pillar. Van der Ent estimates that this market will take four to five years to mature, giving players time to develop a strategy for entering the market. Furthermore the potential client base is a lot lower. Industry experts anticipate a total of 1.5m potential participants, one third of the second pillar market.

Currently, there are just below 100,000 contracts signed in the third pillar market, allowing room for huge growth. This is particularly the case in the corporate sector, as employers will quickly see the value in providing competitive compensation plans in Romania's undersupplied labour market.

The next challenge is the destination of contributions that already exist. Market analysts have long predicted that pension funds will have problems realising the projected returns on premiums as the capital market offers few investment options. Other, more optimistic, analysts see the capital generated by pensions as a trigger for development of capital investments. The national bank of Romania recently told local media that "private pension funds will change the financial landscape of Romania, and accelerate the development of the equity and bond markets."

Many are waiting for the government to take a leading role by issuing government stocks and bonds. So far there has been plenty of talk from the ministry of economy and finance, among others, of a listing of 26 state-shares expected by August 4, but for now nothing has materialised. While optimists remain hopeful of listings in the wake of upcoming general elections, third pillar clients and administrators are keeping their fingers crossed.

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