It was all that, and something more. The impact on German business was just the collateral damage of a deal done to exploit the fastest-growing market in all of Europe’s financial history–private pensions. More than a year before the merger announcement, Allianz chairman Henning Schulte-Noelle had followed trends showing that European welfare states aren’t prepared to support a growing population of aging baby boomers in their golden years. Public pensions, or pay-as-you-go systems, might have worked when there were plenty of young people to support each retiree. But low birthrates and increased life expectancies have changed the equation. By 2050, workers in many parts of Europe will have to support double the current number of retirees. Governments from Italy to Sweden are reforming pension systems to boost the private market for retirement funds that will grow faster in Europe than in the United States over the next 10 years. Goldman Sachs predicts that the retirement assets of households in the United Kingdom, Germany, France, Italy and Spain will rise from more than $3.1 trillion today to more than $10 trillion in 2010. “This is the pie that has people drooling,” says Allianz’s chief spokesman in Munich, Emilio Galli-Zugaro.
The shift to an equity culture in Europe was by no means top secret. For years Allianz has angled for a larger slice of the mutual fund market, particularly in Germany, where retirement assets are predicted to grow at 16 percent per year, spurred on by a new and dramatic welfare reform. But until its merger with Dresdner, Allianz had little chance of increasing its share. The company’s 12,000 insurance agents were used to hawking auto policies. Unfortunately, the new, more sophisticated German investor wasn’t much interested in insurance, and Allianz’s creaky network of door-to-door salesmen were no help in explaining the ins and outs of global equity funds. Three years after setting up an asset-management division, Allianz’s share of the mutual-fund market fell by half. “We had little chance among young, urban customers,” admits Galli-Zugaro. “The old concept where agents would push their products on customers is dead. Today, customers choose products and channels themselves, whether they deal with an agent, a bank branch or over the Internet.”
It would take “a lot of work,” Schulte-Noelle told shareholders, for Allianz to get a piece of that market. Several months later Chancellor Gerhard Schroder announced a series of new pension reforms. Most notable was an American-style tax break on private retirement accounts beginning in 2002, which would represent an additional (euro) 300 billion worth of new business by 2008. Schulte-Noelle, who had kept in close touch with Dresdner CEO Bernd Fahrholz, decided to orchestrate a new deal. Right before Christmas, Schulte-Noelle invited Fahrholz to his office and, over coffee and gingerbread cookies, proposed a full merger. The two put together a rough outline in January and spent the next few months hashing out the details. Now Allianz will be able to push its products to Dresdner’s young, affluent customers via 1,100 bank branches, plus Germany’s fourth largest online brokerage.
Allianz Dresdner will have plenty of competition in its quest to expand in the gray market as other European banks and insurers move in the same direction. Because Europeans prefer to purchase retirement products from an institution they know, teaming up with a local firm is often the quickest way to infiltrate a new market. Axa Group, the French insurance giant, has long made inroads into other European countries by acquiring local players and slowly changing their names so as not to lose customer loyalty. Now the company is in partnership talks with Deutsche Bank. Commerzbank and Assecurazione Generali have also teamed up to sell each other’s products in Germany and Italy. The new continentwide competition will likely encourage Allianz Dresdner, which hasmany more cross-shareholdings to sell for cash, to expand further.
American giants like Fidelity and Alliance Capital are already in the European market, and many more are sure to follow. By the end of the year the European Union is expected to pass legislation allowing mutual-fund companies to obtain a single license to sell in Europe, rather than having to apply country by country. That will save U.S. firms some time, but it won’t end the difficulty of breaking into Europe. Because the equity culture is still young, many financial houses still sell only their own funds, jealously guarding their turf, rather than giving customers a choice. In Germany, as little as 20 percent of the mutual funds sold by banks are from outside firms. Still, that number is up from 10 percent a year ago, largely because of demand from better-educated consumers who read personal-finance publications and ask lots of questions.
Dull and conservative though it may be, the retirement market may be just what Europe is looking for after its wild ride on the Internet bubble. Kurt Schoknecht, the CEO of ACM International, the global-fund arm of Alliance, says this movement toward consumer liberation is fueling American expansion in a market where growth now “outweighs the difficulty of doing business.” Even the recent plunge in share prices has done little to dampen enthusiasm for the pension market, which is built on the inevitable aging of the population. Fidelity’s sales remain strong across the continent, particularly in Germany, where the company has added 155 new staff over the past 18 months. As industry consultant James Ball, of JBI Associates in Luxembourg, puts it, “Whether the market is up or down, you’ll still grow old.” In the end, the graying of Europe may even be the thing that invigorates the global capital markets. It’s that big a deal.
