VOLUNTARY PENSION FUNDS SECTOR IN SERBIA. Fourth Quarter Report 2011

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Damon Osborne Jenkins
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1 VOLUNTARY PENSION FUNDS SECTOR IN SERBIA Fourth Quarter Report

2 CONTENT 1. INTRODUCTION MARKET PARTICIPANTS VPF OPERATIONS... 7 VPF net assets... 7 Structure of VPF assets... 8 VPF securities trading... 9 Fees charged by management companies... 9 Transaction costs Number and structure of VPF users Contribution payments, withdrawals and transfers CONCLUSION NATIONAL BANK OF SERBIA 2

3 1. INTRODUCTION For somewhat more than five years of their operation, voluntary pension funds (VPFs) have recorded a constant rise in net assets that amounted to RSD bln by end-. Relative to the quarter earlier, net assets grew 7.5%, or 26.3% over the last year. Since the start of VPF operation, net assets have been on a continuous rise. Chart 1: Movements in net assets, FONDex and key indicators since the start of VPF operation 14,000 1, ,000 1, Net assets (RSD mln) 10,000 8,000 6,000 4,000 2,000 1, , , , FONDex IV I II III IV I II III IV I II III IV I II III IV I II III IV ,300 1, BELEX15 18% Key policy rate 13% 7% RSD/EUR exchange rate 70 14% CPI 8% 2% NATIONAL BANK OF SERBIA 3

4 At end-q4, FONDex 1 reached 1,470.1 points 2. The return of FONDex, which represents the weighted average of all funds return, came at 2.9% 3, while the return for the last year measured 5.8%. The return on government debt instruments (which at the same accounted for the largest share in the funds portfolio) gave the strongest boost to FONDex. Prices of Belgrade Stock Exchange (BSE) shares, measured by BELEX15 4, continued down throughout Q4. Relative to end-q3, BELEX15 lost 9.7%, a third of its value over the last six months, or 23.4% y-o-y. Liquidity on the BSE remained low. Though higher than in Q3 (RSD 4.94 bln), trading volumes (RSD 6.33 bln) in Q4 fell short of the levels recorded in Q1 and Q2, as well as Q Measured by the number of transactions, activity on the BSE contracted again relative to the quarter before. Though still accounting for the major portion, NIS and Nikola Tesla Airport shares declined sharply to around 12% of total trading (vs. over 30% in Q1 this year). Judging by the number of transactions, the portion of these shares remained high (c. 95% of the total number of transactions on the stock exchange). At end-, the return on frozen FX savings bonds ranged from 4.45% tо 5.75% depending on maturity. Over the last year, the yield curve shifted up and moved from 0.31 percentage points (А2014-series) to 1.44 percentage points (А2015-series), while the change equalled 1.12 percentage points on average for all maturities. The primary market of government debt instruments (T-bills and government bonds) experienced again a sharp decline in the volume of issues, while discount rates remained at the level similar to Q3. Chart 2: Yield curve for frozen FX savings bonds (end of quarter) 9.00% 8.00% Bond yields 7.00% 6.00% 5.00% 4.00% 3.00% A A2012 A2013 A2014 A2015 A2016 Q4 Q3 Q2 Q1 1 FONDex shows movements in investment units of all VPFs in the market. 2 The initial FONDex value of 1000 points was recorded on 15 November 2006 when the first VPF began to operate. 3 12% p.a. 4 Оf total investment in shares, almost 96% were shares covered by BELEX15, which means that BELEX15 is a relevant benchmark for shares in the funds portfolio. NATIONAL BANK OF SERBIA 4

5 The total market value of dinar-denominated issues came at c. RSD bln vs. RSD bln in Q3. In the whole, the total market value of issues was RSD bln. Most issued were 6-month (10.92 bln) and 1-year bills (8.88 bln). Eurodenominated government debt instruments were not issued in this period. Table 1: Return and market value of dinar government debt instruments (by maturity) Maturity Discount rate % Q Q1 Market value (bln) Discount rate % Market value (bln) Discount rate % Q2 Market value (bln) Discount rate % Q3 Market value (bln) Discount rate % Q4 3m 13.50% % % %* %* 3.9 6m 15.00% % % % %* m 14.59% % % % %* m 14.39%* ,60%* %* %* %* m 14.90%* % %* % %* m 14.05% % % %* 1.7 Total Note: Discount rates at the last auction held in the quarter (asterisk (*) means that the auction was not held in the last 10 days of the quarter). Market value (bln) Returns remained at Q3 levels. The greatest change was recorded for 6-month T-bills which declined by 1 percentage point. Chart 1: Yield curve for government instruments (end-of-quarter) 18.00% Yields on Treasury securities 16.00% 14.00% 12.00% 10.00% 8.00% 3m 6m 12m 18m 24m 36m Q4. Q3. Q2. Q1. Following its appreciation in place since early, the dinar weakened against the euro in the last quarter. It lost 3.4% 5, remaining at levels similar to those recorded a year ago relative to end-2010 it gained 0.8%. As around a quarter of fund assets (24%) were invested in euro-denominated financial instruments, the euro s appreciation drove up the funds return in this period. The trend of a slowdown and halt in inflation, initiated in Q2, continued through Q4, while some months recorded even negative rates. In Q4, annual CPI growth was 8.7% in 5 Depreciation of 14.4% p.a. NATIONAL BANK OF SERBIA 5

6 October, 8.1% in November and 7% in December, while monthly price growth rates settled at 0.4%, 0.9% and -0.7% respectively. In response to receding inflationary pressures, the key policy rate was cut further in Q4 and reached 9.75% by end-december, down by 150 basis points on end-q3, or down by 175 basis points on end Mirroring key policy rate cuts, the interest earned by funds on dinar balances held in custody accounts contracted in the same amount for the majority of funds (150 basis points). 2. MARKET PARTICIPANTS At end-q4, the VPF market comprised 6 companies managing 9 VPFs, 3 custody banks, 67 natural persons engaged in dissemination of information about VPF membership (of 233 of them licensed by the NBS to perform such activities) and 4 agent banks 6. Management companies cooperated with 12 brokerage houses in securities trading. At end-, total employment in VPF management companies was 148, up by 25 and 19 q-o-q and y-o-y respectively. Chart 2: VPF market participants 6 NLB banka a.d. Beograd, Raiffeisen banka a.d. Beograd, Volksbank a.d. Beograd and Société Générale Banka Srbija a.d. Beograd. NATIONAL BANK OF SERBIA 6

7 3. VPF OPERATIONS VPF net assets At end-, net assets totalled RSD bln, up by 7.5% q-o-q or 26.3% y-o-y. Furthermore, RSD mln were paid to members individual accounts, which impacted most on net assets growth. Total contributions, net of contribution fees, came to RSD mln, Net assets reached RSD bln and contribution payments RSD mln. Concentration in the sector remains high. whereas withdrawals amounted to RSD mln. Total fees charged by companies were RSD 76.3 mln. Тable 1: End-of-period net assets of the VPF sector RSD bln Measured by HHI, market concentration in the sector7 was relatively high 2,839 points at end-q4. What also attests to high market concentration are 2 funds classified as large and 2 as medium, making up almost 97% of the market, while the largest fund accounted for c. 42% of total net assets. Chart 5: End-of-quarter concentration in the sector 10,000 10,000 8,000 6,000 4,000 2,000 5,142 3,752 3,523 3,311 3,110 2,832 2,754 2,711 2,634 2,866 2,849 3,196 2,920 2,788 2,755 2,681 2,606 2,818 2,862 2,839 0 IV I II III IV I II III IV I II III IV I II III IV I II III IV 2006 Таble 2: Number of funds by groups divided by market share Share in net assets (%) Large (20 and above) Medium ( ) Small (0 4.99) In terms of the share in total net assets. NATIONAL BANK OF SERBIA 7

8 Structure of VPF assets In Q4, government debt securities accounted for the major portion of VPF assets 74.9%, of which T-bills made up 40.3%, frozen FX savings bonds and government bonds 34.6%, demand deposits 10%, term deposits 8.2%, shares 5.4%, and property 0.7%. Most assets were invested in government instruments; one fourth of assets in foreign currency. The greatest change in the structure of VPF assets was recorded for T-bills their share in the portfolio fell by 7.5 percentage points (from 47.7% to 40.3%). In the same period, the share of government bonds rose by almost the same amount (by 7 percentage points, from 18.6% to 25.6%). The Ministry of Finance began to issue these bonds by mid-q1. Funds invested most in 3-year dinar coupon bonds (21.8% of assets) with the end-december return to maturity of 14.89%, as well as in 3- and 15-year euro bonds (3.9%) with respective 5% and 5.85% return at the quarter-end. The share of term deposits rose significantly as well by 3.4 percentage points (from 4.8% to 8.2%). The share of assets denominated in euros was RSD 3 bln or 24% of total assets, while dinar-denominated assets accounted for RSD 9.5 bln or 76%. At end-2010, the share of foreign-currency assets was 39.7%. During the year, as the currency structure gradually changed, the share of these assets declined in by almost 16 percentage points in favour of domestic-currency assets. The major part of assets c. 84%, was exposed to interest rate risk, in response to the rising share of debt instruments in the funds portfolio. Credit risk was also concentrated in investment in government debt instruments. Chart 3: End-of-quarter structure of VPF assets NATIONAL BANK OF SERBIA 8

9 VPF securities trading VPF trading volumes of RSD 4.86 bln stayed at Q3 levels. Government debt instruments and frozen FX savings bonds had the major share in securities purchases. The maturity to sale ratio changed significantly relative to the quarter earlier, settling at 60 : 40 in favour of sale. The share of VPFs in BSE trading was somewhat below 3%. Trading volumes came at RSD 4.86 bln. Auctions of government securities had the largest share. Table 4: VPF securities trading RSD bln Securities trading Purchases BSE Unregulated market Auctions of government securities Sales BSE Unregulated market Maturity Purchase to sale and maturity ratio Share in total BSE trading 1.2% 1.1% 7.6% 4% Fees charged by management companies The Law on Voluntary Pension Funds and Pension Schemes sets out maximum fees that may be charged to fund members. Contribution and management fees may not exceed 3% and 2% respectively, while the account transfer fee may be charged only at the level of real transfer costs. Management fees will be limited to 1.25% after net assets of all funds reach 0.75% of GDP. The new Law, adopted in early May, envisages different fees charged by management companies these fees will be applied once net assets of all funds reach 0.75% of GDP. The maximum management fee is set at 1.25%, while the contribution fee is not capped. Fees are one of the parameters that members should bear in mind when choosing a fund, but should not be observed as an isolated factor. The fee level is contingent on the NATIONAL BANK OF SERBIA 9

10 fund investment strategy and its performance. As a rule, funds actively investing in more complex and riskier instruments are intended for younger persons who pay contributions over a longer horizon. Such funds charge higher fees, but are also expected to post higher return in the long run. On the other hand, a fund investing passively in safe financial instruments should charge lower management fees. Investment policy (scheduled investment by fund members), fees charged by companies, the expected fund return and the risk taken by the fund (and the member) should be accounted for when choosing a fund. Since the start of operation, companies charged a 2% management fee, while the contribution fee declined and currently stands at 2.27%. The relative shares of these two types of fees changed at the start of VPF operation, contribution fees were dominant by contrast to the current 80% of management fees. This was a result of rising net asset value and an enlarged base to which management fees are applied. Though visible in the first instance, the contribution fee is not the largest cost incurred by a member. It is paid only once, as a front-load fee. The management fee is charged every day on the calculated value of VPF net assets and is contained directly in the investment unit value, meaning that the calculated and published value is deduced by the amount of the management fee. A further rise in net assets and boosted fund competition may result in gradual lowering of the management fee. One company has envisaged in its schedule of charges a variable amount of fee depending on its performance in the sector and the sum of accumulated funds in individual accounts. Table 5: Fees from 2007 to 2010 and fees by quarter for RSD mln Contribution fee Management fee Transaction costs Transaction costs are incurred by management companies in securities trading. The new Law envisages that costs arising from the purchase, sale and transfer of securities (Central Securities Depository fees, stock exchange fees, tax charges and costs of the current maintenance of property that fund assets are invested in) are charged against fund assets. Other costs are incurred by the management company these are mostly brokerage fees. Brokerage and custody bank fees account for the largest share of transaction costs. Transaction costs are directly related to the volume of management company trading and types of instruments being traded. Most costs are incurred in stock trading on the BSE and the lowest costs in T-bills trading. In Q4, costs incurred by management companies accounted for 75% and those incurred by funds 25% of the total. NATIONAL BANK OF SERBIA 10

11 In response to relatively high trading volumes at the start of operation, particularly trading on the BSE, transaction costs were the highest at the time. The economic crisis induced contraction in the activity of management companies that directed their investment to safer instruments implying lower cost. In 2009, the costs rose again in response to reduced balances in transaction accounts, a shift to government T-bills and a gradual increase in shares trading. At the same time, a rise in net assets pushed up the value of VPF transactions in absolute amount. Q3 and Q4 experienced a steep fall in transaction costs. Table 6: Transaction costs from 2007 to 2010 and by quarter for RSD mln Transaction costs Brokerage fees Custody bank fees Stock exchange fees Central Securities Depository fees Transfer tax relating to the acquisition of securities VPFs generally invest in long-term debt securities, while the portion of shares is relatively low. Such structure impacts on low transaction costs c. 0.1% relative to net assets. Number and structure of VPF users At end-q4, 174,868 8 of users were in the accumulation phase 9. Total membership contracts 10 stood at 234,405. At the same time, 16 users holding 24 membership contracts, who are currently in the withdrawal phase, are receiving scheduled Q4 saw 2,400 new membership contracts and around 1,000 new users. payments. All information from this point onwards, unless specified otherwise, refers to users in the accumulation phase. 8 The number of users is the number of members of one or more VPFs. The number is smaller than the number of membership contracts as a significant number of users have more than one membership contract in one or several funds. 9 VPF membership has two phases the accumulation phase (when contributions are made) and the withdrawal phase (when funds accumulated are withdrawn). 10 The number of membership contracts is the sum total of individual membership contracts and the number of members of all pension schemes. NATIONAL BANK OF SERBIA 11

12 Table 7: Number of contracts and users from 2007 to 2010 and by quarter for in thousand No. of contracts No. of users Percentage of active % 34.9% 33.6% 31.5% 32.0% 33.0% 35.1% users In the period, the strongest growth in the number of new users was recorded in 2009 (close to 10,000), while 2010 saw a marginal increase. The upward trend continued in when the number of users rose by more than 8,000. Average accumulated funds per user depend on the amount of contributions, the funds return and the length of the accumulation phase. All three factors impact on the growth in average funds in members individual accounts. The average amount of accumulated funds of members who have made at least one contribution is RSD 84,500 and is constantly rising. As the percentage of active members ranges between 30% and 35%, and is broadly unchanged since 2009, we can assume that the majority of these users contribute to pension funds each month. VPF users in Serbia may be domestic and foreign persons. The number of domestic persons holding fund membership contracts is much higher than that held by foreign nationals who, however, hold on average six times more funds in their accounts. Table 8: Average funds from 2007 to 2010 and by quarter for Average accumulated funds in thousand At end-q4, the number of members of 2 or more VPFs amounted to 34,391 or close to 20% of the total. In terms of gender composition, no significant changes were recorded relative to previous years. Men remained dominant with c. 59.4%. The gender ratio is slowly changing among new members, there were around 50% women. At end-, the average age of VPF users was close to 44 years, while users aged accounted for over 61%. Such structure has not changed since the start of VPF operation. Further, the percentage of users meeting the age requirement for the 11 Data on the number of users and the average amount of accumulated funds are available as of June The average percentage of active users by month in the period it relates to. NATIONAL BANK OF SERBIA 12

13 withdrawal of funds (53 years under the old Law) was largely similar to earlier years and accounted for approximately 20% of the total. Table 9: Number of users by number of funds in which they are members Number of funds Number of users 1 140, , , Тable 10: Number of users by membership contract Number of contracts Number of users 1 129, , , Table 3: Structure of users by payment dynamics Period Number of users Share (%) Active users 1 month 61, % 3 months 64, % 6 months 70, % 12 months 74, % From the start of membership (1) 147, % No holdings (2) % Total (1+2) Chart 4: Distribution of VPF users by age 7,000 6,000 5,000 4,000 3,000 2,000 1, No. of users ,103 49,490 57,574 45,433 9,968 Amount of funds (mln) , , , Average holdings 8,780 16,576 39,582 70,181 81,875 72,484 47,358 NATIONAL BANK OF SERBIA 13

14 Contribution payments, withdrawals and transfers Apart from 2007 when most VPFs were set up and when contributions were the lowest, total contributions were stable throughout the years, ranging between RSD 2.2 and 2.5 bln a year (). In, contributions into VPFs amounted to over RSD 2.5 bln. In quarterly terms, contributions were stable over the past year, trending between RSD 550 and 660 bln. Q4 payments were the highest since the start of VPF operation RSD 708 mln. Growth in contributions is customary for the last month in a year, when payments to employees are at the highest level. Table 12: Contributions from 2007 to 2010 and by quarter for RSD bln Total contributions Most contributions are made through pension schemes that imply the highest saving for the employer in terms of the exemption from tax and contribution payment for the paid-in amount, up to the legally stipulated ceiling. Furthermore, pension scheme sponsors can negotiate the level of contribution fees for their members, which is another reason for the above contribution method. Chart 5: Volume and structure of total contributions by year and by quarter in In Q4, of total contributions, individual payments accounted for c. 18%, employer contributions 36% and pension schemes c. 46%. This ratio has remained broadly unchanged since Though the Law envisages individual payments, most contributions were made through contributors and pension schemes. Employers may contribute on behalf of their employees and thus make saving in the form of tax relief. Ample potential for further growth in the membership base are companies with high staffing levels. NATIONAL BANK OF SERBIA 14

15 Withdrawals are generally lump-sum, which is logical as members entitled to withdrawal are not long-standing fund members and their accumulated sum is therefore relatively small. The future period is likely to see an increase in scheduled and other In, withdrawals by eligible members amounted to over RSD 500 mln. types of withdrawals, in response to growth in accumulation years and the accumulated sum, particularly after the adoption of the new Law setting the maximum lump-sum amount to be drawn at 30%. Table 13: Withdrawals from 2007 to 2010 and by quarter in RSD mln Total withdrawals Withdrawals grow by the year as a result of system development as contributions and net assets increase and Pillar III matures, absolute withdrawals will rise as well. In Q4, contributions exceeded withdrawals by c. RSD 540 mln. However, what is atypical for the nature of VPFs is that withdrawals are made as soon as users turn 53 (the minimum retirement age) even before they meet the requirements for state pension. One of the reasons is a short contribution period and small accumulated funds. Transfers concern inter-fund transfers. A member may transfer a part or all of his/her assets from one fund to another, thereby covering only the real transfer costs. The largest transfers were Inter-fund transfers amounted to RSD 166 mln in. recorded in In H2, average transfers were lower than in earlier years they amounted to around RSD 17 mln in Q3 and less than RSD 10 mln in Q4. Table 14: Inter-fund transfers from 2007 to 2010 and by quarter in RSD mln Total transfers CONCLUSION In 2010 and early, long-term dinar and FX T-bills were issued, as well as maturity government coupon bonds. At the same time, shares of two large companies NIS a.d. Novi Sad and Nikola Tesla Airport were listed on the BSE Prime Market. The first municipal bonds are about to be issued as well. NATIONAL BANK OF SERBIA 15

16 The appearance of new financial instruments, notably long-term, is highly significant for VPFs as it enables more efficient assets and risk management, including greater investment diversification in line with each company s investment plan. Tax reliefs increase each year in accordance with rising retail prices. At the onset of VPF operation, the relief equalled 10% of average wage or RSD 3,000. The amount set for 2012 is RSD 4,647 employers are exempt from the household income tax and mandatory social insurance contributions, while natural persons do not have to pay the household income tax provided contributions are made via wage garnishment. There is ample room for the further development of Pillar III in Serbia. As the economy recovers and the standard of living improves, contributions into private pension funds will rise as well. Clear signals about the need to save for old age, sent to citizens by economic policy makers, are likely to bolster the sector development. Further, awareness raising and education about VPFs will certainly enhance citizens interest in securing additional retirement income. Besides, more weight should be lent to private pensions in the dialogue between employers and employees, enabling employers to display greater social care for their staff. NATIONAL BANK OF SERBIA 16

INSURANCE SUPERVISION DEPARTMENT PENSION FUNDS SUPERVISION DIVISION VOLUNTARY PENSION FUNDS SECTOR IN SERBIA

INSURANCE SUPERVISION DEPARTMENT PENSION FUNDS SUPERVISION DIVISION VOLUNTARY PENSION FUNDS SECTOR IN SERBIA Fourth Quarter Report 2018 Contents: 1 Market participants... 3 2 VPF net assets... 4 3 Structure