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Polish Pensions Going Private

March madness has overtaken Poland as the country has embarked on the first stage of the privatization of its pension system.

Asset management companies have unleashed a barrage of advertising and their representatives are going door to door, trying to persuade Poles to entrust them with their retirement savings. Even the Polish Conference of Bishops has entered the fray, having formed an alliance with Invesco Retirement & Benefit Services of Atlanta, Ga. to sell pension funds.

"The country has gone stark crazy," says Alicja K. Malecka, executive vice president and chief executive officer for Pioneer International Financial Services, a division of Pioneer Group. Malecka says the competition will only intensify. Currently, an estimated 150,000 agents representing over 15 pension funds are vying for the $1.5 billion Poles are expected to place in these funds this year. Within two years, over $4 billion is expected to be place in these funds, she said.

The privatization of Poland's pension system is occurring in stages. First, a state-mandated, privately-run pension plan was introduced March 1. In this stage, employees must contribute to a fund of their choice. By April, employers will be able to offer voluntary pension plans, similar to defined contribution plans, to their employees. At that time, employees will be allowed to invest in mutual funds through their pension plans.

Companies like Invesco, which has applied for a pension fund license, and Pioneer, which has already received one, are taking advantage of the pension reform to develop their brands and distribution channels for making inroads into both the voluntary pension plan and retail mutual fund markets. The voluntary pension business could reach $10 billion annually, said Malecka.

While most of the licensed pension funds are run by Polish insurance companies, American companies such as Citigroup and American International Group have been awarded licenses as well.

But Malecka says that the domestic insurance companies have an advantage over other competitors at this point.

"They are aggressive and they have a lot of money," she said. "It's clear that insurance companies are the most aggressive of the pack."

But that is not stopping companies like Pioneer and Invesco, which hope to grab a piece of the mandatory pension pie as well as the voluntary pension and retail mutual fund businesses.

Invesco is taking a novel approach. Invesco Retirement & Benefit Services has teamed up with the Polish Conference of Bishops to create a pension fund company called Arka Invesco. Invesco owns 80 percent, while the Polish Conference of Bishops, a powerful Catholic church affiliate, owns the remaining 20 percent. A portion of the new company's profits will go to charity. The Conference of Bishops will distribute the charitable contributions.

Invesco formed the alliance because the Conference has deep knowledge of Poland and its culture and because the Conference is held in high esteem, said Hubert Harris, chief executive officer of IRBS.

"They are basically the oldest organization around," Harris said. "They are very important to the development to the country."

By vying for the mandatory pension business, companies will gain entree to the retail mutual fund and voluntary pension business, Harris said.

"I'm very optimistic that once we get up and running, we'll be very competitive," Harris said. The joint venture will create its own agent organization for distribution.

Pioneer has deep roots in Poland and may have an easier time gaining market share than other U.S. companies. It was the first company, foreign or domestic, to offer a mutual fund in Poland. That first fund, the First Polish Trust Fund, was offered in 1992 by a Pioneer unit called Pioneer First Polish Investment Fund Company, according to the company. The unit, which now has four funds, has $350 million in assets under management. There is now $500 million invested in all mutual funds in Poland, said Malecka of Pioneer.

However, much more has to be done to educate the Polish public about investing, said Malecka. Right now, the public is being deluged with marketing, advertising and salespeople but it is not being educated about how pension reform will affect retirement.

"People don't see the benefit of long-term money management here," Malecka said. "And everybody's trying to make money out of it."