Mandatory retirement changes will be offering many new opportunities for money managers
The introduction of mandatory defined contribution or auto-enrollment programs in several European countries, on top of retirement market reforms last year in Germany, could bring additional workplace savings assets to money managers.
Managers will have a wider scope of markets available to them as mandatory defined contribution plans and auto-enrollment programs are being introduced in Poland and Ukraine next year. In Ireland, where DC plans already are available, auto enrollment will begin in 2022.
Some 11 million workers each in Poland and Ukraine will be joining DC plans as well as an additional 1 million workers in Ireland, according to government estimates.
Added to that are the retirement savings of younger workers many multinational companies have hired.
The Dow Chemical Co. is working on launching a DC plan for its employees in Poland, said Olga Ruf-Fiedler, the company's savings and pension leader Europe, the Middle East, Africa and India, based in Zurich.
Under a law passed this year, companies employing workers in Poland are obliged to set up employee capital pension schemes. Companies with more than 250 employees in Poland have to have the plans established by Jan.1; smaller employers will have until mid-2020. Plan sponsors will contribute a minimum of 1.5% and employees, 2%, of salary.
The new legislation will boost the $54 billion retirement savings market by an additional $6 billion per year starting in 2020, according to Ministry of Finance data.
Money managers say these changes across the Continent will spur development of cross-border arrangements, which they think are the best fit for multinational sponsors. Multinational companies are expected to bring employees into these new programs sooner than smaller employers.
Amundi has just opened a compartment for Ireland in its cross-border investment vehicle, said Christian Lemaire, global head of retirement solutions at Amundi in Paris.
"This new compartment allows us to expand our multicountry retirement offering. (These developments) are good. With IORP 2, we see more (chances) open for cross-border vehicles," Mr. Lemaire said, referring to 2014 revisions to the Institutions for Occupational Retirement Provision.
Paul Bonser, London-based senior partner who is a board member of United Pensions, Aon's multicountry and multiemployer plan offering with €300 million ($352 million) in assets, said: "One multinational company in the chemicals sector we are working with decided to put its DC assets in a multiemployer plan for the first time because that was the best way for them to improve governance and participant engagement. DC is a scale game — needed to get the right participant outcome."
Mr. Bonser expects cross-border multiemployer or single-country multiemployer plans will work for different DC markets. "For Ireland, as well as for Germany we have launched a single-country master trust," he said. Aon's Ireland DC offering, which is already operational, has €700 million in assets under management.
"For Germany, we are in the process of launching a United Pensions Deutschland, a master trust focused on the German market," Mr. Bonser added.
As recently as in 2017, the German government introduced a defined contribution system that allowed employers to enroll employees into a plans with a defined target return rather than a guranteed return.
The introduction of mandatory DC plans in additional European countries is expected to fuel consolidation, sources said. These new markets will become consolidated at a much quicker pace due to domestic governments permitting only a set number of managers — four to five — that will be allowed to run the new assets throughout a given period of time.
While money managers will still be able to provide investment management services to these providers, savers will instantly benefit from scale.
Jerry Moriarty, CEO of the Irish Association of Pension Funds in Dublin, said that in Ireland, where a voluntary defined contribution system already exists, the auto-enrollment program consultation is running simultaneously with one about consolidating smaller DC plans into multiemployer plans known as master trusts.
"The master trust proposal is almost a copy-paste from the U.K. market. The regulator is looking to raise government requirements, which they say will push (smaller plans) into master trusts," Mr. Moriarty said.
If adopted in the current form, mandatory auto-enrollment will become available in 2022.
In other markets, sources said, changes also indicate a consolidation might be in the cards. The Polish law caps management fees at a monthly fixed rate of 0.5% of net plan assets under management and a yearly investment management fee based on performance to be capped at 0.1% of net plan assets under management.
No limits in Ukraine
In Ukraine, the reform that will introduce government-mandated defined contribution plans next year does not limit the number of managers that could come to the market, said Grigoriy Ovcharenko, director and head of local asset management at Investment Capital Ukraine in Kiev. The Ukraine plans will have both auto enrollment and auto escalation. The initial participant contribution rate will be 3%, and that will rise to at least 7%, he said.
Mr. Ovcharenko noted the Ukraine regulator, the National Securities and Stock Market Commission, wanted a top contribution rate of 15%, but the parliament stayed with 7%. In Ukraine, 55,000 savers have individual retirement contracts and 790,500 participants have corporate plans with a combined assets worth $100 million that will move to the new DC setup.
Until 2015, Ukrainian workers relied on social security funds, with the state contributing as much as 36%.
"But one negative aspect of the reform is that it doesn't provide the incentive for employers to participate," Mr. Ovcharenko said. "And employers are not obliged to contribute. A reduction in the social tax in 2015 also doesn't leave room for the state to contribute. The state pension contribution has reduced to 22% from 36%," he said.
ICU has a 17% of the share of the existing corporate pension market or around 2.5 billion hryvnias ($88 million) in assets under management.