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  2. DEFINED CONTRIBUTION
October 01, 2018 01:00 AM

New laws put managers on a more level playing field against insurers

Paulina Pielichata
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    Thomas Huth believes the new laws are opening DWS to several new avenues of business serving both pension funds and insurance companies.

    Legislative changes across Europe are increasing the flexibility and simplicity of workplace retirement plan design, changes that put money managers in a better position to compete with market dominating insurance companies.

    Insurers have about 80% of the retirement savings markets in Europe compared with 20% that is in the hands of money managers, according to sources.

    Now regulators, in efforts to reduce what they see as a fragmented market with an excessive number of defined contribution arrangements, are making more categories of retirement savings plans available to money managers, while at the same time condensing the influence of insurers.

    In Germany, for example, legislators in 2017 opened three sources of assets to money managers that previously were available only to insurers. And starting this year, the Irish and French defined contribution markets will see a reduction in insurance-based retirement offerings. Sweden and the Netherlands witnessed similar changes in the past few years.

    Money managers said they expect to take some business away from insurance companies or to partner with insurers to provide investment management services.

    Michael Hennig, head of workplace investing, Germany, investment and pension solutions at Fidelity International in Kronberg, Germany, said, "Where the asset managers won't set up their own (retirement plans) they will partner with an existing insurance provider."

    With regulators opening up markets to money managers' strategies, some sources said those firms offering lifecycle strategies could be in a sweet spot, as those approaches are better prepared to weather the current investment conditions than insurers' guarantee-based insurance products because they don't depend on fixed-income returns and offer better diversification.

    "Multinational companies are moving their employees to DC plans away from individual insurance policies," said Christian Lemaire, global head of retirement solutions at Amundi in Paris. "This means more corporations are using lifecycle strategies instead of low-yielding insurance products."

    In Germany — the most recent DC market to open up and the most carefully watched European market — the government last year did away with guarantee-based arrangements by introducing workplace defined contribution plans for the first time. Aimed at giving the workers in collectively organized industries with unions access to non-private collective defined contribution arrangements, the reform introduced occupational DC plans and opened existing categories of individual workplace DC plans to money managers.

    More for managers

    Money managers in Germany now can either compete with insurance companies to manage the assets directly, or be a subadviser to the insurers. Sources said money managers also can build a market presence through assisting plan executives, or insurers, with asset allocation decisions, alongside other services such as record keeping or retirement outcome management and communication.

    Fidelity's Mr. Hennig said, "The new regulation is a chance for money managers to have a big share in the occupational pension market. For the first time we have a chance to compete with insurance companies."

    Thomas Huth, head of pension management at DWS AG in Frankfurt, agreed.

    "We had access to two out of five types of retirement savings categories," Mr. Huth said. "The rest was in the hands of insurers. Now we can manage money for real pension (and) direct workplace pensions, and we can provide money management to insurance companies.

    "We are talking to a couple of market participants we can partner with in order to discuss more formal arrangements and repercussions of the move to (workplace) DC. We have started to do work where we think we can provide value, such as to provide actuarial calculation for the risk-sharing model in the new (setup). We can provide smart algorithms that would help plan sponsors choose which money management strategy is the best for their workforce."

    However, for plans in collectively organized industries — known as the "social partner model" — sources said, the regulators put additional requirements on providers to communicate and help manage retirement outcome for participants. This means providers might find it more beneficial to partner with each other to supply the needed tools. "Plan sponsors are obliged to tell their participants what is the (current) value of the pot and what is the expected pension benefit, which means a more (collective) approach to the plan design is appropriate," Mr. Huth said.

    Mr. Hennig said Fidelity is "working on a project to export the financial wellness program from our parent company in the U.S. The front-end solution needs to be sustainable so the participant can calculate retirement income at any point."

    Dominic Byrne, director and investment strategist with BlackRock Inc. in London, said "Europe is an area of focus for us as multinational companies are increasingly looking for a DC solution that would work across Europe. We don't yet have a specific German target-date fund, but we can adapt our model to country-specific solutions as well as a cross-border approach ... And we think for the DC market, a lifecycle strategy rather than a balanced fund is often more relevant."

    "We have studied demographic trends in European countries and we can form a glidepath for other countries, similar to the ones we implemented in the U.S. and in the U.K," Mr. Byrne said.

    However, Mr. Hennig thinks target-date funds are "suboptimal" for the emerging DC market in Germany because the new law does not permit taking the pension benefit as a lump sum.

    "It is prohibited by the law. We don't need target-date funds; we need a drawdown tool," he said.

    In other parts of Europe, regulators are ensuring the influence of insurers in employee savings plans is decreasing by making changes aimed at eliminating fragmentation of retirement savings arrangements. Managers believe these changes also could help them increase their share of the market.

    No annuity requirement

    In France, a new law known as PACTE is expected to be voted on by the end of the year that will remove the requirement that participants purchase an annuity when they leave their retirement plan. "The government wants retirement products to be more flexible and simple in both the accumulation and decumulation phases, to the benefit of strategies offered by managers," Amundi's Mr. Lemaire said.

    Under the current proposal, one DC program would replace the mandatory supplementary collective plan known as PER, the voluntary collective occupational DC plans known as PERCOs, and individual retirement savings plans, known as PERPs or Madelins. The goal of the French government is to reach, by 2020, €300 billion of assets in retirement savings vehicles from the current €220 billion.

    "At the moment there are three or four products that savers can choose from in a market dominated by insurers, (but that is) to be replaced by one," Mr. Lemaire said.

    In Ireland, too, regulators are looking to eliminate fragmentation in the market by removing products that were previously offered by insurance companies.

    Jerry Moriarty, CEO of the Dublin-based Irish Association of Pension Funds, said, "There are a number consultations taking place in Ireland at the moment aimed at phasing out some personal pension arrangements and removing retirement annuity contracts and buy-out bonds."

    The Irish government is consulting with the industry on personal pension products and a post-retirement drawdown offering to be replaced by one personal retirement savings account.

    In the Netherlands, alongside ongoing changes that will shift collective defined contribution plans into pure defined contribution plans, regulators have reduced the influence of insurers by abolishing annuities in the decumulation phase.

    Martijn Vos, partner at risk management consultancy Ortec Finance Ltd. in Rotterdam, said that "until two to three years ago, you had an obligation to buy an annuity but the change in the law has allowed retirees to keep their savings invested in equities."

    Annuities meant that 80% of DC assets were invested in fixed-income products, with the remainder in equities, Mr. Vos said.

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