BUDAPEST -- Hungary's 4-month-old private pension fund system is booming.
But consolidation in the industry already is occurring, as most participants are selecting just a few large funds as pension providers.
While assets under management are just a tiny 1.9 billion forints ($9 million), 700,000 workers have shifted into bank- and insurance-sponsored funds during the first three months of this year. (Companies also can create their own pension funds, but they are closed to nonemployees.)
That appears to be well ahead of schedule: experts had estimated 1.2 million of Hungary's 4.5 million working adults would enter the new system during its first two years.
Last year, the Hungarian Parliament passed a law that shifted one-quarter of state pension contributions into private funds, effective Jan. 1. All new entrants into the work force must participate in new private plans while other workers have two years to decide if they want to switch (Pensions & Investments, Nov. 10).
Most of the 700,000 participants represent transfers from the state pay-as-you-go pension system. The majority of new entrants to the work force start their first jobs in summer or fall, after graduation.
"This is a good sign. It means we have fulfilled the expectations of future pensioners," said Tibor Parniczky, vice president of State Private Funds Supervision, a regulatory agency.
But Mr. Parniczky said the early surge in enrollment doesn't necessarily mean the government's estimates are completely wrong. He said more sophisticated urban dwellers accounted for the early switches; more rural inhabitants might be reluctant to change retirement systems.
While the funds are growing, consolidation already is occurring, as participants are selecting a few large funds. Currently, about 80% of private-plan participants are in five of 12 fully licensed funds.
Since the beginning of the year, two small Hungarian funds have been swallowed up by larger ones.
ABN-AMRO Pension Fund Administration Co., a local arm of the Dutch banking giant, took over the Aranykor Pension Fund with its 11,000 members earlier this year. Combined with its own fund, the Aranykor-ABN-AMRO fund now has a combined 13,000 members.
"ABN-AMRO wants to manage the assets of pension funds," said Andrea Alpar Franco, managing director. "We want to offer all possible services to our clients."
Nonetheless, Ms. Alpar Franco said she isn't sure whether ABN-AMRO will take over more funds. She said this transaction was easy because the managers all knew each other and had a close relationship.
Still, observers believe further consolidation is inevitable. There are 12 fully licensed funds in Hungary. To be fully licensed, a fund must have at least 2,000 participants. If it fails to meet that threshold, the fund can be taken over or participants can switch.
Another 34 funds are awaiting approval, only six of which now have 2,000 members.
"In the next two to five years, there will only be 25 funds in Hungary," Mr. Parniczky said. "There are small ones that just won't survive."
FUNDS DANGLE LURES
AB-Aegon Pension Fund is the largest player, with more than 188,000 members. Its assets totaled 580 million forints ($2.7 million) at the end of March.
"For us this is not just a matter of the pension business. It is another service an insurance company must provide. It is more important for us than for the others," said Peter Zatyko, general manager of Aegon Pension Fund Management Ltd., Budapest.
Mr. Zatyko added the fund is considering giving its pension fund members free disability insurance as an added bonus. "The features between the funds are very similar. You need to be creative," said Mr. Zatyko.
AB-Aegon wouldn't be the first fund to lure members with incentives not directly related to pensions. Budapest-based OTP Private Pension Fund, which is run by Hungary's largest retail bank, is attempting to lure in members with low interest rates on credit cards and lotteries for free vacations.
The ploy seems to be working.
At the end of March, the fund had approximately 100,000 members, which means it was tied for third largest, with Hungaria Insurance Rt.
SCRUTINY OF ADS COMING
Smaller pension funds have grumbled they can't compete with such incentives because they aren't backed by large banks or insurance companies. And while the marketing bonuses are not illegal, Mr. Parniczky worries such incentives are sending the wrong message.
"(Picking a) pension fund is a long-term issue. It is not an issue that should be decided by where you might win a holiday," he said. "These are not related issues. They have nothing to do with pensions."
Mr. Parniczky's office is working on establishing a self-regulating body that would oversee funds' advertising practices. A code of ethics and competition, forbidding such freebies, is about to be circulated among the funds for their comments.
If approved, the self-regulatory body would be established in the fall.
Aegon's Mr. Zatyko said he would consider supporting such a body even though he believes unethical behavior would still continue. He maintained even if the larger funds can't offer special incentives to members they will prevail anyway because they are most cost effective.