May 2011

ASSOCIATION COLUMN: Strong incentives needed

AndrasTemmelIn 2008, assets managed by the European fund management industry decreased by more than 22% according to Efama (European Fund and Asset Management Association). As in most countries, wealth destruction, increasing uncertainty, withdrawals from investment funds and flight to deposits could be experienced in Hungary and the CEE (Central and Eastern Europe) region (the fund industry in Hungary falling by 21% in 2008). In the following years, an equity boom and new flows into investment funds meant that by the end of 2010 members of Efama managed slightly more assets than three years prior. The fund markets in the CEE region were also on the rebound, Hungary standing out by showing close to 8% three-year growth in euro terms. In our region, however, an additional aspect of the crisis needs to be considered. As is often the case with young financial markets and emerging countries, the accumulated wealth of individuals is very low compared with more developed countries. If the main goal of the asset management industry is to foster wealth accumulation and to direct the flows to where it can help the economy most (thus helping investors with high return and the economy with new investments in the most promising sectors and companies, as well as financing the state), it is vital to have a strong asset management sector, with enough assets under management (AuM) to prove to investors (with track records and sound practices) their worth and to make an impact on the economy. The recent developments in the Hungarian pension system have to be mentioned here as well. The government’s decision to, in effect ,dismantle the second pillar mandatory pension fund system in place for 13 years was controversial. This happened while many other governments in the region tried to fight high deficits by taking contributions away from second pillar pension funds. Though the decision of the Hungarian government is less than equivocally supported, it did highlight the problem that individual savings were rather low and figures were distorted by mandatory savings. Therefore, in this region there is a strong need for voluntary savings channels, such as voluntary pension funds, or the recently introduced long-term investment accounts, which will allow retail investors to help build up financial wealth parallel to building financial literacy. If the crisis made investors uncertain about their investments, and if in the CEE region accumulated wealth is low, it is paramount not only for the asset management industry but also for the future growth of these emerging economies to provide a helping hand in the
shape of strong incentives for long-term savings. The most obvious way governments can support long-term savings is through tax breaks, but learning from other experiences tells us there are other possibilities – state donations to savings accounts, for example.  nother positive step towards achieving this was the introduction of a 16% flat rate income tax, which will leave a larger share of earnings for the individual and thus foster savings. But another important facet where governments in our region can help is the creation of new voluntary savings channels. This is all the more important since the already existing ones – such as the previously mentioned long-term savings accounts in Hungary – tend to be favoured by those with pre-existing savings or those with a higher socio-economic status (higher earnings and education, more knowledge about savings and tax optimisation). What would be needed is incentives for those who may consider themselves unable to save – and in our region, they represent the majority, 60% of the population in Hungary, according to a recent survey. People in this region grew very dependent on the state. The pension systems introduced in the 1990s were designed to put some of the burden of pension provision on pension providers and individual pension fund members, and the mandatory nature of pension fund membership let individuals build up pension wealth without having to deal with financial issues. It has neglected, however, to take into consideration the needs of employers – that was left to third pillar funds, which are by nature voluntary, and companies can decide whether to encourage their employees to be members of these funds. What is now needed is some sort of quasimandatory system of defined contribution workplace pensions (there are good examples in developed countries), whereby employees – unless explicitly opting out – by default become members of a system sponsored by their employers, with contributions coming from individuals, companies and the state. Although details will have to be worked out, in my opinion this is the only solution to replace mandatory pension funds. András Temmel is secretary general of the Association of Hungarian Investment Fund and Asset Management Companies (Bamosz) ©2011 funds europe

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