MetLife Completes Takeover of Aviva’s Operations in Eastern Europe
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At the beginning of this month, MetLife, Inc. (NYSE: MET) finished the takeover of Aviva plc's (NYSE: AV) branches in Eastern Europe (Aviva Life Czech Republic, Aviva Life Hungary and Aviva Life Romania) in a transaction estimated by market analysts at $90 million.
The deal also includes Aviva Private Pensions Romania, though the purchase is pending authorization from the National Committee for the Supervision of Private Pensions. The Romanian pension system is going through a partial reform, by shifting a part of the compulsory social security contributions from public to private management. Starting 2008, 2 percentage points out of the 10.5% that employees are forced to send to the Public Pension Ponzi Scheme from their income are directed to privately managed funds. The percentage was supposed to increase annually by 0.5% and reach 6% in 2016, but a one-year delay occurred and the amount for the 2012 fiscal year is set to 3.5%.
The rule only applies to employees older than 25, and is optional, with full deductibility (within 200 EUR), for those between 35 and 45, which amounted to 34% of the initial adherents (25-35 years old made up 42%). Workers over the age of 45 do not have the “right” to fiscal deductibility if they choose to contribute to a private plan and are facing low state pensions and devaluation from inflation, therefore creating a potential for growth from voluntary contributors.
All the private administrators of Tier II Pension Funds in Romania (compulsory contributions, yet privately managed…yet heavily regulated) can retain a maximum of 2.5% of the gross subscribed premiums as management fees, which all chose to do.
Since January 1st, 2008, Aviva Private Pension Fund posted an annual average yield of 10.22%, ranking 7th in the national standings, and it was also 7th ranked by annual subscribed premiums.
MetLife also owns Alico, after a 15.5 bn. USD deal with AIG (NYSE: AIG) in the spring of 2010, with its Romanian branches, Alico Life and Alico Private Pensions. The newly acquired Aviva will merge with Alico Private Pensions Romania (3rd annual yield, with 11.65%, and 3rd by underwritten contributions), to consolidate its 3rd place, reaching assets of 150 mil. EUR (185 mil. USD) from more than 650,000 clients. Therefore, revenue growth is supposedly guaranteed for the next five years solely from commissions on compulsory pension contributions, not to mention potential private pension plans from the existing pool of clients.
Nevertheless, Eastern European markets are still far from free (not that Western Europe or the US are a “laissez-faire” haven) and Government interference is significant and arbitrary, especially at a time when public funds are hard to find, but private ones are at hand.
Take Hungary, for example, where an alternative private pension system was set up un 1998, and by 2010 it was managing assets of 14 billion EUR (roughly $17.2 billion, not adjusted for inflation). A slice of 70% of the pensions would be paid by the state upon retirement, while the rest would come from the private system.
On November 24th 2010, contributors were given until January 31st 2011 to decide whether they would stick with the private plan and lose any public pension (while contributions would still be taken) or “voluntarily” switch over their savings to the state budget and “benefit” from a full state pension. Needless to say, the number of wage earners with a compulsory pension plan decreased overnight from 3 million to roughly 100,000. To make the financial business environment even more attractive, a proposal from the Parliament’s Budget Committee aims at forcing the remaining gullibles to turn back to the state system.
Other similar cases include Poland, Bulgaria, and, starting this week, Slovakia, which will reduce the contribution percentage from 9% to 4% of the wages, starting September.
Fortunately, Aviva only operates in Life Insurance divisions in Hungary and the Czech Republic, though this severely narrows down opportunities for further growth. In Romania, due to a relatively young private pension system, the volume of assets is still reduced: $1.75 billion in 2nd Pillar and only $116 million in 3rd (completely voluntary contributions) from 5.7 million people; and since the Government is still capable of borrowing money to run deficits, there is no immediate danger of any seizure. Actually, unlike Hungary’s Viktor Orban, there is no radical left-wing voice calling for a nationalization of private funds and I don’t see any on the rise.
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