Pension reform coming at a steep price for fund participants
And that is seemingly high commissions and fees being charged by funds that will manage contributions made through the reform's second pillar.
Commissions on the pension funds range from PTE BIG Bank Gdanski's 7.9% to a whopping 15% for AIG PTE. (See also Pension Reform in Focus, pages S1-S8)
"The levels are really very high," said Ken Ayers, a spokesman for Frank Russell, a London-based global investment and fund management consultancy. He added that while there is justification for advice and commissions for salesman, "nevertheless there are limits."
And in other parts of Europe those limits are well below what the new pension funds plan to charge here.
"It certainly does not happen in the U.K.," said John Blowers, publisher of web-based financial information company Interactive Investors. He also noted that the British government has been increasing pressure on the funds to account for charges.
But pension funds argue, it's all a matter of perspective. Commissions on Polish pension contributions are downright reasonable when compared to those in South American countries, which can be as high as 20%.
"In general, compared to Latin America, I think that they (Poland's) are quite low," said Michal Szczurek, executive vice president at PTE Nationale-Nederlanden Polska, whose commissions are 8.7% for the first two years and then 5.8%.
Part of the reason for such high fees in South America is lack of participation and fund hopping.
In Argentina and Chile, only about half of those signed up actually make contributions to the pension funds, which must be maintained at a certain level regardless of contributor levels. Another factor in Latin America's high commissions, said Marek Gora, director of the Office for the Plenipotentiary of Pension Reform and one of the authors of the new system, is that contributors often change funds, causing increased marketing efforts.
But in both Mexico and Argentina, changes are being introduced that will make this more difficult, said Szczurek. He added that 80-90% of those signed up for Poland's pension funds will be contributing.
By law, the pension funds are required to keep a reserve fund in case the pension funds come short of the legal required operating capital of ECU 4 million. How much from each commission will go into a reserve account for the fund itself is at the company's discretion, said Gora.
Almost every pension fund has an asset fee, which is limited to 0.05% each month and is for asset management, as well as a nominal transaction fee, for the fund custodian, which should be less than the asset fee, he added.
What percentage of the contributions will go to management and what will actually go into the fund is also unclear.
While the high fees will make it extremely difficult for the funds to generate real returns in the first few years of their existence, many believe the funds will be more focused on building market share.
That is why, some said, AIG, which is active in Latin America, has gone at the high end of the fee scale, believing that its volume is dependent on its sales network. But some warned that this is unlikely to fly in a European society, which is watchful of commissions and fees.
"We have to remember that these cultures are different," said Piotr Jablonski, marketing manager with Winterthur PTE.
AIG commissions are expected to decrease to 14% after two years. In the third year, the commission will be 13%, followed by 12% in the fourth year.
"They could not live with that in the U.S. and the U.K." said Ayers, because they would just not get the business.
"This has shocked any right thinking person," one pension fund player, who asked not to be identified, said of AIG's high commissions. "They've kissed goodbye to getting any business."
In comparison, Commercial Union PTE has a start-up commission of 10% for the first two years, after which the fee decreases to 4%.
lukasz Grzejdziak, a manager with Deloitte & Touche who was expecting fees to be half of what they currently are, said that AIG may be planning to receive contributors by default since after the deadline a pension fund will be assigned those who did not contribute. "Then they can have clients ... who were selected," he said.
In the West, said Ayers, getting into a pension fund would normally mean a commission of 4% to 5% on each contribution, after which an asset management charge of 0.5% would be charged on a per annum basis.
For at least the next two years commissions will go toward funding marketing campaigns as well as paying agents, in essence, getting the company started.
"At the moment the people have to pay for their activity," said Joanna Narkiewicz, a consultant with PricewaterhouseCoopers.
"I think it is very unreasonable," for contributors to be paying such costs, said Ayers, because companies usually secure financing for things like marketing beforehand.
In 1999, Nationale-Nederlanden PTE is expecting to pay $8 million-$12 million for marketing. And average commissions for sales agents are about zl. 80. "We don't expect high revenue," said Szczurek.
Contributors to the funds will also not be seeing any profit for a while. "We can even say that they will have a loss," said lukasz Grzejdziak, a manager with Deloitte & Touche.
But in about two years, these losses will be made up and it is not such an important factor to worry about if plans are for 30 years, predicts Szczurek.
The pension funds may actually start adjusting their commissions shortly after they start operations, either by fractions of a percent or even whole percentage points, as they start making comparisons with other companies, Szczurek said. This could lead to a price war in time and although the law forbids incentives for contributors to join, attracting business could be done indirectly by offering incentives to salesmen.
"The competition ought to start quite quickly especially because there appears to be a lot of fat involved" in the costs, said Ayers.
Commissions on the pension funds range from PTE BIG Bank Gdanski's 7.9% to a whopping 15% for AIG PTE. (See also Pension Reform in Focus, pages S1-S8)
"The levels are really very high," said Ken Ayers, a spokesman for Frank Russell, a London-based global investment and fund management consultancy. He added that while there is justification for advice and commissions for salesman, "nevertheless there are limits."
And in other parts of Europe those limits are well below what the new pension funds plan to charge here.
"It certainly does not happen in the U.K.," said John Blowers, publisher of web-based financial information company Interactive Investors. He also noted that the British government has been increasing pressure on the funds to account for charges.
But pension funds argue, it's all a matter of perspective. Commissions on Polish pension contributions are downright reasonable when compared to those in South American countries, which can be as high as 20%.
"In general, compared to Latin America, I think that they (Poland's) are quite low," said Michal Szczurek, executive vice president at PTE Nationale-Nederlanden Polska, whose commissions are 8.7% for the first two years and then 5.8%.
Part of the reason for such high fees in South America is lack of participation and fund hopping.
In Argentina and Chile, only about half of those signed up actually make contributions to the pension funds, which must be maintained at a certain level regardless of contributor levels. Another factor in Latin America's high commissions, said Marek Gora, director of the Office for the Plenipotentiary of Pension Reform and one of the authors of the new system, is that contributors often change funds, causing increased marketing efforts.
But in both Mexico and Argentina, changes are being introduced that will make this more difficult, said Szczurek. He added that 80-90% of those signed up for Poland's pension funds will be contributing.
By law, the pension funds are required to keep a reserve fund in case the pension funds come short of the legal required operating capital of ECU 4 million. How much from each commission will go into a reserve account for the fund itself is at the company's discretion, said Gora.
Almost every pension fund has an asset fee, which is limited to 0.05% each month and is for asset management, as well as a nominal transaction fee, for the fund custodian, which should be less than the asset fee, he added.
What percentage of the contributions will go to management and what will actually go into the fund is also unclear.
While the high fees will make it extremely difficult for the funds to generate real returns in the first few years of their existence, many believe the funds will be more focused on building market share.
That is why, some said, AIG, which is active in Latin America, has gone at the high end of the fee scale, believing that its volume is dependent on its sales network. But some warned that this is unlikely to fly in a European society, which is watchful of commissions and fees.
"We have to remember that these cultures are different," said Piotr Jablonski, marketing manager with Winterthur PTE.
AIG commissions are expected to decrease to 14% after two years. In the third year, the commission will be 13%, followed by 12% in the fourth year.
"They could not live with that in the U.S. and the U.K." said Ayers, because they would just not get the business.
"This has shocked any right thinking person," one pension fund player, who asked not to be identified, said of AIG's high commissions. "They've kissed goodbye to getting any business."
In comparison, Commercial Union PTE has a start-up commission of 10% for the first two years, after which the fee decreases to 4%.
lukasz Grzejdziak, a manager with Deloitte & Touche who was expecting fees to be half of what they currently are, said that AIG may be planning to receive contributors by default since after the deadline a pension fund will be assigned those who did not contribute. "Then they can have clients ... who were selected," he said.
In the West, said Ayers, getting into a pension fund would normally mean a commission of 4% to 5% on each contribution, after which an asset management charge of 0.5% would be charged on a per annum basis.
For at least the next two years commissions will go toward funding marketing campaigns as well as paying agents, in essence, getting the company started.
"At the moment the people have to pay for their activity," said Joanna Narkiewicz, a consultant with PricewaterhouseCoopers.
"I think it is very unreasonable," for contributors to be paying such costs, said Ayers, because companies usually secure financing for things like marketing beforehand.
In 1999, Nationale-Nederlanden PTE is expecting to pay $8 million-$12 million for marketing. And average commissions for sales agents are about zl. 80. "We don't expect high revenue," said Szczurek.
Contributors to the funds will also not be seeing any profit for a while. "We can even say that they will have a loss," said lukasz Grzejdziak, a manager with Deloitte & Touche.
But in about two years, these losses will be made up and it is not such an important factor to worry about if plans are for 30 years, predicts Szczurek.
The pension funds may actually start adjusting their commissions shortly after they start operations, either by fractions of a percent or even whole percentage points, as they start making comparisons with other companies, Szczurek said. This could lead to a price war in time and although the law forbids incentives for contributors to join, attracting business could be done indirectly by offering incentives to salesmen.
"The competition ought to start quite quickly especially because there appears to be a lot of fat involved" in the costs, said Ayers.
