Private pension funds to outsource investments: the regional lesson
Private pension funds are dealt with differently in the region, depending on whether the asset management activity (investment) can be outsourced or not, according to an exclusive survey conducted by the portal www.privatepensions.ro. A debate on this topic is currently underway on the Romanian market, therefore regional practice could be relevant. While Hungary, Slovakia and the Czech Republic allow the private pension funds to outsource the asset investment activity, Croatia, Bulgaria and Poland ban this practice.
In Romania, mandatory private pension companies are pressing to get the permission of the Private Pension Supervisory Commission (CSSPP) to outsource to the financial groups operating in asset investment. However, at the same time, CSSPP took a stand (a bit nuanced, it’s true) against this practice. In theory, pension funds are forbidden the outsourcing of asset management, but in practice, they can sign consulting agreements with entities from their group for the transfer of know-how in investment management.
“We shall not allow the pension companies to outsource their core activity, namely asset management. Of course, pension companies can use people or know-how from within the group, they can even sign consulting agreements with other entities within the group, but we shall not allow them to sign any asset management outsourcing agreement”, stated Mircea OANCEA, president of CSSPP, in an interview for the portal www.privatepensions.ro.
But what is the common practice in the region? In Hungary, the second largest mandatory private pension market (pillar II) in Central and Eastern Europe, asset management outsourcing is allowed both for mandatory pensions, and for voluntary pensions (pillar III).
„Hungarian pension funds are allowed to outsource their asset management activities, both for Pillar II, and for Pillar III. In fact, almost all funds are currently using the services of specialized companies for asset management, the number of those preferring to conduct these operations “in-house”, through their own investment departments, being very low”, stated Ferenc SZEBELEDI, deputy director of the regulatory department of the financial markets supervisory authority from Hungary (PSZAF).
“Nevertheless, the supervisory authority thinks that conflicts of interest might appear, especially in the financial groups. To avoid such situations, PSZAF has similar prerogatives on the asset management companies and on the private pension funds’ administrators, imposing limitations on operation costs and administration commissions used by administrators in their relation with the providers of asset management services”, added SZEBELEDI.
In the Czech Republic, the largest voluntary private pension market in Central and Eastern Europe, the legislation allows the pension funds to outsource their investments activity. The external asset manager is an institution as common as the auditor and the depository bank, according to the data published by the Pension Funds Association from the Czech Republic. Eight of the ten Czech pension funds outsourced this activity, usually to the asset management company within their group.
In Slovakia, the legislation for mandatory and voluntary pensions differs. “The Slovakian legislation allows asset management outsourcing only for voluntary private pension funds, namely Pillar III. For Pillar II, the law does not allow the outsourcing of asset management”, stated Roman JURAS, CEO of GENERALI Poistovna (GENERALI Pensions Slovakia).
On the other side, there are countries where the legislation and the regulatory authority do not allow private pension funds to outsource their investment activity. A clear position in this respect is seen in Poland (the region’s largest mandatory private pension market) and in Bulgaria.
“The Bulgarian pension funds were established as independent legal entities, with the sole purpose of saving for retirement, meaning individual accounts management, asset management and pay out of retirement benefits. According to the law, these activities cannot be outsourced. It’s hard to say whether this is the best solution or not, whether other markets should adopt it or not. It might be that, if it produces positive results and operates efficiently according to the accepted norms and policies, it is worth considering as a potential model. Experience shows that in reality, there is no model for a pension reform, as each country has to find the solutions that fit best, while considering the culture, the traditions, the current practices and their own public expectations”, mentioned Nickolai SLAVCHEV, chief analyst at ALLIANZ Bulgaria Pension Company.
He stresses one more aspect: as pension funds accumulate assets and grow, they become more attractive for other entities on the financial market. “However, it is worth noticing one aspect that becomes more prominent in the European debates: the higher the volume of assets managed by the pension funds, the more interested all financial institutions become in being part of the „food chain of contributions-investments-benefits” in this business”, he said.
Actually, this started to happen in Romania as well: last month, the representatives of an association of private equity funds in the region started lobbying at the CSSPP to get permission for the pension funds to invest in private equity funds as well. However, sources from CSSPP stated that “right now, they stand no chance” to be granted such a permission.
In Croatia, the investment outsourcing is also confusing. “In principle, private pension funds from Croatia have the freedom to outsource for asset management invested outside Croatia. However, none of the funds do it”, commented Dinko NOVOSELEC, president of ALLIANZ Croatia.
Sources from the Croatian private pension market mentioned a precedent, when the fund managed by RAIFFEISEN applied for the authorization to outsource the asset management to the group’s specialized unit from Vienna. Considering that such a collaboration with an affiliated entity is inopportune, the supervisory authority did not agree. In fact, it seems that, without expressing an official opinion, HANFA (the regulatory and supervisory authority for the Croatian financial markets) is determined not to allow asset management outsourcing, even if the law allows it.
