WARSAW, Poland -- Poland's move to private funds is eagerly awaited by money managers, who are jockeying for position ahead of the projected April 1 startup.
Nineteen operations -- typically joint ventures between American or Western European managers and domestic partners -- have sought government licenses to offer the open-end pension funds.
Poland is viewed as one of the key markets of Central Europe. Money managers see the country's population of 40 million, sound infrastructure, solid track record of reform and expected entrance to the European Union as major pluses.
Polish workers are projected to contribute up to $4 billion a year to the new funds, after an initial influx of about $2 billion in the first nine months of 1999, said Norman Bregel, managing director and head of international operations for Alliance Capital Ltd., the London-based arm of Alliance Capital Management.
"So it's a classical, exciting market. And, if it succeeds, it will be a model for the rest of Europe," said Mr. Bregel, who oversees Alliance's joint venture with Bank Pekao.
In 10 years, the Polish market is expected to be worth around 200 billion zlotys ($57.8 billion), said Jean-Baptiste Segard, who oversees Paris-based Paribas Asset Management's global pension fund business.
The only potential hitch is a rumored delay in the startup of the new system. Reports are the new administrative system of ZUS, the Social Insurance Institution -- which will transfer money into workers' choice of pension fund --might not be ready on time.
Based heavily on the Chilean model, the new private pension system will rely on open-end defined contribution vehicles.
Workers age 30 or younger will be required to join the system, with 9% of pay being diverted to individual accounts from the 45% tax now paid to the social security system. Those between ages 31 and 50 will have the choice of joining the new system or sticking with the old pay-as-you-go system. Older workers will remain with the state pension system.
At retirement, participants in the private system will be required to purchase an annuity -- creating another potential bonanza for the insurance industry down the road.
But with only four months until the private system kicks off, money managers are scurrying to obtain licenses, hire staff and develop marketing campaigns. Given the retail orientation of the market, they say, finding distribution channels and developing brand-name recognition will be critical, especially in the early stages.
Those who fail to build a critical mass of business are expected to fall away, as already is occurring in the Polish mutual fund business.
"It's pretty clear that six to eight companies will control 80% of the market within two years," said David Steele, planning manager-international, Norwich Union PLC, Norwich, England.
That's why finding distribution channels has become so key in establishing a business. Paribas and the French insurer Cardif have teamed up with Poczta Polska, the Polish post office, with its roughly 7,000 offices spread across the country.
Alliance Capital's ties with Bank Pekao will help hugely, but the firm also is seeking other strong partners. Meanwhile, Alliance is sending Polish personnel to train in its Secaucus, N.J., office. Its Warsaw office has 30 staffers now, and that is set to increase to 50.
Establishing a brand-name presence also is deemed essential. Alliance already is the third-largest mutual fund provider in Poland, with 122 million zlotys in assets under management. The firm boasts the top performance records in bonds and equities for the past two years.
Meanwhile, Pioneer International Financial Services, the Warsaw-based unit of Pioneer Group, Boston, is developing its own distribution network. The firm is the largest mutual-fund provider in Poland, with about 78% -- $350 million -- of the market share, said Alicja Malecka, president.
Pioneer officials also aim to be a major player in the individual savings market that starts the same time and eventually is expected to surpass the pension market, she said.
Linkups between domestic firms and foreign partners dominate the list of funds seeking regulatory approval. One interesting joint venture is between BIG Bank Gdanski S.A., and Eureko B.V., an Amsterdam-based alliance of seven financial groups -- largely in insurance -- from Holland, Great Britain, Portugal, Denmark, Sweden, Germany and Switzerland.
Meanwhile, officials at giant insurer Allianz AG Holding, Munich, Germany, plan to leverage the firm's reputation. The insurer plans to establish its own distribution network in Poland, building an agent network and working with domestic banks and brokers, said spokesman Jon Kozero.
Money managers initially will be able to offer only one fund. Polish rules penalize managers that underperform the industry average, which is expected to lead to fairly uniform and conservative asset allocations, weighted heavily toward domestic bonds.
A manager whose returns are more than 50% or four percentage points -- whichever is larger -- below the industry weighted-average real return would have to make up the shortfall from a special reserve, and then from the manager's own capital. A guarantee fund financed by pension fund companies would cover losses in case of insolvency. payments to its fund.
The regulator will determine the industry average at the end of each quarter, based on returns during the previous 24 months.
The averaging mechanism protects Polish workers against poor-performing funds, but it's "a shame in one way because everyone will be mirroring every one else," said Norwich Union's Mr. Steele. It will take a number of years before performance becomes a key aspect of picking a fund, he added.
The rules also cap international investments at 5% of fund assets, but experts believe those restraints will be loosened over time.
With lack of differentiation on performance, experts agree fees will be critical.
"The crucial thing is the front-end load," Iain Batty, a partner with London-based law firm Cameron McKenna who also helped draft the Polish pension legislation, told a recent conference run by EURACS, an affiliation of European actuarial firms.
With management fees capped at five basis points a month, 60 basis points annually, the level at which money managers set the front-end load will be hugely competitive, he said. Fees will have to be uniform for each participant.
So far, managers expect front-end loads to run between 8% to 12% of the first year's contribution, with some managers contemplating even higher charges, Pioneer's Ms. Malecka said. However, managers are being extremely secretive about the fees they plan to charge.
Fees "are still very confidential information," Mr. Steele said. "Because the product can't be differentiated, charges will be one of the biggest differences."
Alliance Capital's Mr. Bergel, however, thinks fees will be split between insurers, which will charge a rich fee to pay for their distribution, and others that charge less. "There's no doubt there will be a massive amount of competition," he said.
