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The pension business gets ready for Brazil's new long-term outlook

Tarcísio Godoy; Marcelo Wagner

CEO; head of risk management and planning/Brasilprev

Published  Friday, October 9, 2009

Brazil's federally controlled Banco do Brasil (BB) is a bank on a mission, and it's not just about banking.

While TV ads tell you how the bank helped keep credit flowing in the midst of the worst financial crisis in decades, BB had been quietly working to consolidate its insurance operations into a more coherent behemoth. That is until this week, when the bank finally announced that it would be teaming up with Spain's Mapfre in life and P&C to build a more formidable player in the market. 

However, explicit plans for BB-connected private pension unit Brasilprev, of which US financial group Principal owns 46.01%, were not in the mix. The bank wants a greater stake in these operations, but how it will achieve this has not been made clear. 

BNamericas spoke to Brasilprev's CEO Tarcísio Godoy and its head of risk management and planning Marcelo Wagner to see how the company had been approaching Brazil's increasingly long-term oriented economy and its own very significant growth in contributions.

BNamericas: Something that many executives have been mentioning is the change in outlook for the Brazilian economy, with families and companies starting to think about long-term prospects for the first time instead of short-term economic issues. How has that changed your business?

Godoy: After the [government's] Real [economic] plan [of 1994 to fight inflation], we started separating fiscal and monetary policy [more formally], and this started to develop a sort of culture much more oriented to thinking about the real costs of things. Inflation has been something very present in the Brazilian mind until just recently.

Another factor [increasing this long-term thinking] has been the growing longevity of the Brazilian population, and all this leads to an increasing need for financial education of the population.

Wagner: You saw a similar change like this in Chile, but it was on a smaller scale, due to the smaller size of the economy.

Godoy: The difference between Chile and Brazil is that Chile first did economic reform and then it did political reform, but here first we did political and then we started to democratically debate the best path to follow - economically speaking - which does not necessarily mean a straight line.

You also have President Lula deciding not to run for a third term, so this is a very good thing for our democracy, especially for a president who reached 80-85% approval ratings.

This environment is creating a huge opportunity for pension products in Brazil. You have three pillars of this industry: [state-run] social security, closed funds [for employees of a particular company or industry] and open funds. However, we have to remember that the open funds, represented by Fenaprevi, are not entirely linked to retirement, per se, since even if you are 55-65 years-old, you're likely not ready to stop working, as the dynamics of the labor market and society in general have changed.

BNamericas: In the January to July period, you saw 68% growth on your VGBL products over the same period last year, while Bradesco was flat and Itaú Unibanco, which is somewhat hard to compare due to their merger, is up about 9%. How are you pulling off such big numbers compared to your peers?

Godoy: If I have just one word, I would say suitability. Our product is the most suitable for our distributors to explain and sell to our clients. I think the advantage that we have is also from the fact that BB has been delayed in its arrival to this market, so we have space to grow.

Wagner: Imagine having over 35mn customers in the largest distribution channel in a country with Brazil's potential.

We also have a [strong relationship] between our product design and our sales force. Our sales force is very sophisticated, and it makes a lot of difference when you're able to sell what your client needs.

BNamericas: Clearly, BB's distribution network is a point of envy in the market, but is it just that BB's client base is so under cross-sold compared to its peers, so these clients have never been targeted with these products before?

Godoy: I think that the point is that we have to mature across BB's distribution structure, since we do have to sell more to BB's clients, but we also have to do more than that. Selling is the first part, but we also have to deliver. People have confidence in BB and Brasilprev, and we are building a very efficient risk management and investment structure.

As part of all this, we will continue to grow faster than the market.

BNamericas: But can you keep up the near 70% growth?

Godoy: We will, and we think we can take advantage of the consolidation in the market. However, we're not trying to say that we'll grow so much faster than our competitors [to brag]. Our goal is increasing the value for our clients.

Wagner: We do customer satisfaction surveys and we found that 85% of our individual clients were fully satisfied with our products. The numbers were 73% for our corporate clients and 90% in our large corporate clients. Obviously, if a client is happy with our service, they will let their friends know.

Godoy: We also have a huge base of clients that we haven't reached yet.

BNamericas: What is your view of the differential between VGBL and PGBL growth?

Godoy: Higher and lower income people buy VGBL, while many middle-class people buy PGBL products, which makes the growth much more consistent. We've also been growing very well in the PGBL market, picking up 4 percentage points in market share in the last year and coming away as the leader in this segment.

BNamericas: Over this economic cycle, BB has gone against the trend and added lending and clients like nearly no other bank in the system, gaining large amounts of market share. This potentially opens up major avenues for you by having more and more loyal clients at BB branches. How do you take on Itaú Unibanco, as it gains traction in its insurance and pension operations following its merger, and other large banking players?

Godoy: I think this is a very good kind of competition as the Brazilian market has gotten more concentrated. Both BB and Itaú Unibanco are now even looking outside the Brazilian market [and into international operations], so it's not even enough to just dispute this market.

Obviously, Brasilprev will have to share the market with 3-4 [other players] and we will have to work hard to take our share. Our goal is to have 25-35% of the assets in the open pension fund market, and this is a challenging goal, but BB also knows that it doesn't want to have more than about this level.

BNamericas: Are suitability, having simple products that meet your client base's needs and other quality indicators how you compete with a reinvigorated Itaú Unibanco or are there other ways in which you take the competition on?

Godoy: Itaú doesn't compete on price; they compete on value. BB tries to add value too, often doing that by lowering the price, where it can. Brazil has a very sophisticated banking system, in which about 20% of the assets are in foreign-owned banks, 40% in public sector banks and 40% in private sector Brazilian banks. I don't believe this will change that much. I think the next stage of the game will see Bradesco take 1-2 steps to rebalance it somewhat [after its rivals' M&A in Brazil], but BB and Itaú Unibanco have started to look abroad to gain scale.

BNamericas: Does Brasilprev follow?

Godoy: No, no, no. We don't follow [now], because we are still focused on the local market, but probably we can follow [to some extent] by investing in some of these countries. As BB becomes a more international bank, we will have more opportunities on this front.

ABOUT THE COMPANY:In the largest private pension segment, known as VGBL, the company is the third placed player in contributions, taking in 2.48bn reais (US$1.39bn) in the first eight months of 2009, but it grew 81.0% from the same period in 2008, according to the latest data from regulator Susep.

Brasilprev also leads the PGBL segment in contributions with 835mn reais in contributions, up 23.6% in the same comparison.

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