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Defined contribution

Chances for manager gains expand as funds sprout up across Europe

Paul Bonser
Aon Hewitt’s Paul Bonser

Government-led initiatives to boost creation of multiemployer, multicountry retirement plans are opening opportunities for money managers across Europe.

Initiatives are underway in countries including Germany, where a new, pure defined contribution system is being established this year. In France, new legislation will require life insurance companies to segregate their retirement businesses from general account balance sheets and create a new retirement category.

As a result, sources expect more pooled retirement funds across several countries to pop up, including occupational retirement multiemployer frameworks and master trusts. These vehicles will be big enough to create the scale that will allow smaller retirement funds to invest in larger projects such as infrastructure and generate significantly higher returns, supporters hope. In turn, larger pots of money will be seeking asset managers.

One such arrangement, the pan-European, Belgium-based multiemployer DC plan for research employees across Europe — The RESAVER Pension Fund, with an expected asset target of €100 million ($106 million) to €150 million after five years and €500 million to €1 billion after 10 years — launched last week. It currently works with employers in Hungary and Italy.

Similarly, in early 2016, the Netherlands introduced the General Pension Fund APF, a multiemployer plan targeting employers based in different European countries. APF enables smaller retirement funds from different companies and countries to merge in a pooled vehicle — a multiemployer arrangement aimed at achieving economies of scale.

Also fueling expectations is the Directive on Institutions for Occupational Retirement Provision II, which has already prompted the emergence of cross-border plans among larger, multinational companies. Sources think smaller occupational plans will follow the companies' example and consolidate into cross-border plans as well.

“The largest multinationals in the market can use the buying power to consolidate their pension funds in-house,” said Alice Evans, global head of LifeSight strategy and markets at Willis Towers Watson in London. Besides leading LifeSight, the firm's defined contribution multiemployer pension trust, Ms. Evans also leads the firm's European DC business.

“We are definitely seeing a growing a demand for multiemployer, multilocal solutions with consistent offering across territories as an alternative to cross-border plans.”

Paul Bonser, partner in Aon Hewitt's U.K. international retirement practice in London, which advised the European Commission on creating the RESAVER plan, agreed. “In response to market demand, retirement service providers are developing multicountry capabilities, and this trend is expected to gather pace, enabling the coverage of smaller groups of employees in a cost-effective way.”

Significant opportunity

Sources say the opportunity for money managers is significant, with a typical European occupational plan's assets sitting in the €200 million range. According to the 2015 figures from European Insurance and Occupational Pensions Authority, Belgium for example had 465 plans with total combined assets of €24 billion, while Austria had 14,391 plans with €19 billion. Italy and the Netherlands had 391 and 398 plans respectively with total assets of more than e100 billion each.

Germany offers one such opportunity, since the concept of a master trust does not yet exist there. Changes due to take effect this year will introduce pure DC plans with an automatic enrollment policy, which sources said will create a new pool of assets to manage. The German government estimated that the change could bring 3 million participants into the retirement industry for the first time.

A number of other countries could make similar changes in the next several years as DC plans grow in prominence. An executive at a Europe-based pension provider that is gearing up to launch this type of offering who spoke on condition of anonymity, said: “There is a growing chance in a few countries, which could be serviced by multilocal arrangements including Germany, but also Poland and Czech Republic.”

Similar to Germany, the Czech Republic does not yet have a typical DC structure.

The Organization for Economic Cooperation and Development estimated that the collective assets in Poland's occupational pension funds at about $2.7 billion. These assets could be consolidated into an existing multicountry structure elsewhere in Europe, according to the same executive.

But observers said there will be barriers to entry for small organizations seeking to operate a plan serving members from multiple European countries. Ms. Evans said: “There aren't many players out there who could offer multilingual call centers to ensure efficient governance.”

Taxation a challenge

The most significant challenge providers could face when setting up European hubs servicing pan-European pension plans is taxation. The European Commission intends to address the tax issue by encouraging discussion on pan-European pension taxation this summer — a project that will form part of Europe's Capital Markets Union proposition.

Despite the challenges, proposed legislation in France could attract more money managers to service occupational plans. The Sapin II legislation, adopted in November 2016 and taking effect by mid-2017, will create a new supplementary retirement vehicle to move the assets managed by insurance companies outside of the investment restrictions imposed by the European Union directive Solvency II.

Sapin II will introduce a new form of corporate pension funds in France which, according to sources, has been a limited market to date. The change has mainly been created to remove the retirement business from the general account balance sheets of insurers being hurt by costs under Solvency II. The Association Francaise de la Gestion Financiere, the French Asset Management Association, said in a November white paper that the pension contracts managed by insurers are worth €150 billion.

But Mathilde Sauve, head of institutional solutions at AXA Investment Managers in Paris, commented in an email: “It's difficult to say at this stage whether this will be a completely new business area for asset managers, as most of the assets affected will still be managed by the insurance company. But it will give some more leeway for insurers regarding their investment strategy.”

Jonathan Libre, senior analyst data analytics and market intelligence consulting firm Spence Johnson, said: “The French regulator has stated that it could affect up to €130 billion in assets.”

This article originally appeared in the March 6, 2017 print issue as, "Chances for manager gains expand as funds sprout up across Continent".