BUDAPEST - And they're off: Hungary's banks, insurers and brokers are competing to win market share in the country's mandatory private pension system that starts in January.
Newspapers already are bulging with ads beckoning individuals with promises of good service, safety and high returns. The campaigns are set to be expanded to radio and billboards this month. Meanwhile, employee benefit managers said they are besieged with calls from sales people pitching the various funds.
"I'm just getting so many calls," said Eva Kiraly, human resources manager of Asea Brown Boveri Ltd., Budapest. "If I had to meet with them all, it would take all of my time."
ABB has hired Marsh and McLennan Ltd., Budapest, to help it decide which funds it should present to its 1,000 employees. Individuals are free to join any fund they choose, but because the whole concept of mandatory private pensions is new in Hungary, many workers are expected to turn to their employers for guidance.
The choice will not be easy for consumers, human resource managers or consultants tapped to aid in the decision process. So far, 20 funds have been issued preliminary licenses by the Supervision of Voluntary Mutual Benefit Funds, the government regulator. Another 20 to 30 licenses are expected to be granted before next summer. By law, each fund must have at least 2,000 investors.
Starting in January, all new entrants into the work force must join the new system, which requires employees to put 6% of their salaries into the private pension funds. Employee contribution rates will rise to 8% by 2000. Employers will continue to put 30.5% of workers' salaries into the state pay-as-you go system, but nothing into the new system.
The existing 5 million-strong Hungarian workers will have two years to decide whether they want to opt into the new system. Experts say within those two years, a total of 2 million people will be in the new system.
In the first few years, an estimated $1 billion annually will flow into the new funds - not a big pool of money when divided among an estimated 50 funds.
While the funds haven't even started operating, experts already are predicting a contraction in their number.
"There will be 20 big funds," said Peter Zatyko, general manager of Aegon Pension Fund Management, Budapest, a division of the Dutch insurance company. Mr. Zatyko maintains it will be too difficult for smaller funds to compete with large banks' and insurance companies' ability to finance splashy marketing campaigns and pay commissions to agents. "You can just buy market share," he said.
Size will be important
Mr. Zatyko maintains a fund will need 50,000 members to be truly cost efficient. He has promised his board he will have 55,000 members by January. To date, it has signed 4,200 people.
But winning market share won't be easy.
The problem is there will be little difference among the funds because all will have to meet a government-mandated minimum investment return, which experts said will, at least initially, steer most money managers heavily into the government bond market.
"There is just no real difference between the funds," said Adam Gere, managing director of Sedgwick Noble Lowndes Kft., Budapest, which has seen its business increase 50% from last year. "Everybody is pretty much the same."
If everyone is invested in the same vehicles, returns will be similar. The minimum return is expected to be released by the government regulator later this.
At the same time, pension managers say they are loath to start a price war over fees. When voluntary mutual benefit funds - a form of savings plan - were introduced in Hungary three years ago, managers lured clients by constantly lowering fees. But managers say that price-cutting has made it almost impossible for them to make a profit.
For example, when Aegon Pension Fund Management introduced its voluntary fund two years ago, it started by charging a 10% fee. That has been slashed to 5%. Most of the mandatory funds are planning to charge a 5% fee.
"We are watching each others' hands very carefully," Aegon's Mr. Zatyko said. "But we all know that if we start a price war, we go to making money in 15 years instead of 10."
The prospects for the Hungarian market are discouraging to some. For example, Budapest-based insurer AHICO Rt., which is owned by American insurance giant American International Group, hasn't decided if it will enter the fray.
"We are less than enthusiastic about the law," said Sam Baker, director of pensions at AHICO Rt. 9We're not enthusiastic about the market potential."
Because investment managers won't be able to boast about different investment strategies or low costs, pension funds are seeking ways to stand out. Some funds are spending heavily on advertising while others said they want to remain small so they won't be burdened with large marketing and commission costs.
Aegon is spending $1 million on advertising its new pension fund - a hefty amount for Hungary. It is also sending its 4,000 agents door-to-door to drum up business. Aegon also has a panel of 25 financial and insurance experts that present its fund to human resources managers. But even with all of the efforts, Aegon doesn't expect to make a profit for 10 years.
Creditanstalt Securities Ltd., Budapest, is taking a different approach to launching its pension fund. Peter Holtzer, Creditanstalt's director of asset management, says his firm aims to create a much smaller fund than most - between 20,000 to 30,000 people. It will only be marketed to clients of the bank through direct mail and personal contacts.
"You can make money in this business if you are not spending millions of dollars on marketing and commissions," said Mr. Holtzer. He added that eventually money managers will diversify out of the bond market, and investors will be lured to funds because of investment return, not ad campaigns.