When voluntary pension funds began to operate, it was believed that the state system would be significantly relieved, and the accumulated savings would enable many people to live a carefree old age. However, this enthusiasm did not go far. The collected funds are mainly invested in government bonds, which does not provide a stimulating return, which is additionally reduced by high fees for managing fund assets. And that property, relatively modest, recorded a decline for the first time in 2022, while yields were „in the red“ for the third year in a row, which continued, albeit more slowly, in the first quarter of 2023. Only about ten percent of employees decide on a contract, but only a third of them are active.
When the state pension system has not been reformed, nor has the so-called second pillar been introduced whereby the employer obliges to pay part of the contributions for its employees into a dedicated private fund, it was expected that at least the third pillar of the system, voluntary pension funds, will play a much more significant role in the market. The state supported the idea with large tax breaks, inaccessible to banks and insurance companies, although they also have products that are essentially very similar to the models of these funds.
Despite this, pension funds are slow to reach users and since 2006, when they started operating in Serbia, it was only at the end of last year that the number of members (215,500) included ten percent of employees, but the number of active ones, that is, those who have at least one annual payment, only slightly higher than a third of users or about three percent of the total number of employees.
The National Bank of Serbia for B&F points out that the number of members of the funds is increasing year by year, and at the end of 2021 there were 4,770 active users more than at the end of 2020, during 2022 the number of contracts increased by 2,312 users, and at at the end of the first quarter of this year, there were as many as 18,097 active users more than at the end of the same period last year. The largest number of payments are made through employers who pay funds into the fund for their employees, but there is also a noticeable increase in individual payments of contributions, which is a great potential for further growth in the number of members of pension funds, according to the NBS. They also indicate that since the establishment of the first funds, their total net assets have continuously grown, but that at the end of 2022, a decline was recorded for the first time.
“Net assets at the end of 2022 amounted to 48.2 billion dinars, which is 1.7 percent less than at the end of 2021. The change in the value of the funds’ net assets depends on member payments, fees charged, accumulated assets paid out and investment returns. The decrease in the value of the funds’ net assets in 2022 was due to a negative investment return, which was recorded for the first time, as well as a temporary increase in payouts, which is a consequence of negative circumstances on the global financial market. From the aspect of the fund’s asset investment structure, the return is affected by: the return on government debt instruments in which most of the fund’s assets are invested, changes in the value of shares, interest rates, changes in currency exchange rates, etc., the central bank emphasizes.
Fall in value – current market disruption
They add that voluntary pension funds are collective investment institutions with a long-term investment horizon, “so it should be borne in mind that this is a one-time and momentary disturbance in the market. The proof of this is that in the first quarter of this year, net assets grew by 1.7 percent on an annual basis, and that these assets amounted to 49.68 billion dinars on March 31, 2023, that is, about 423.5 million euros. .
For the sake of comparison, insurance companies in the life insurance category, which is a similar form of accumulated savings as in pension funds, had more than one billion euros at the end of the first quarter of this year. Also, savings in banks (which includes models with a similar function as in funds) at the end of the first quarter amounted to 14.7 billion euros and is a consequence of continuous growth, even though in the previous three years we were exposed to the pandemic, energy crisis and the crisis caused by war in Ukraine, with the common characteristic that they caused uncertainty at the global level.
A slightly different picture emerges when looking at the yield realized from investments, mainly in government bonds. The NBS reminds that “the movement of the FONDex, an index that is a unique indicator of the trend of the system of voluntary pension funds, is relevant for monitoring the results”, but they draw attention to the fact that data on the historical value of the index do not represent a guarantee of the future results of that long-term investment, which may be higher or lower .
“At the end of 2021, FONDex’s annual return was 1.3 percent, while its return since the beginning of operations was 7.8 percent. At the end of 2022, the annual return of FONDex was -2.2 percent, and since the beginning of operations it was 7.2 percent, the same as at the end of the first quarter of 2023, when the annual return of FONDex was -0.3 percent,” point out in the NBS.
A different calculation
However, at the beginning of last year, the Fiscal Council, analyzing 15 years of operation of voluntary pension funds, emphasized that the nominal value of the yield must be subtracted from the inflation rate, which significantly devalues savings in the case of such a long-term investment over a number of years. According to that calculation, the average yield was around three percent until 2019, “which can be considered an adequate result, especially considering the global financial crisis of 2008”.
Of course, there were better and worse years in the operations of the funds, so the real rate of return in the crisis year of 2008 was in the minus by more than 15 percent, while in 2015 it reached almost that amount, but in the plus. In the pandemic 2020, after a long time, the yield is again in the real minus by 0.3 percent, the following year it was minus 6.1 percent. As inflation was 15.1 percent last year and the yield was minus 2.2 percent, the real yield was -17.3 percent, which is the worst result so far.
The modest returns achieved by funds invested in pension funds are also influenced by the investment structure dominated by government debt bonds. At the end of last year, they accounted for as much as 76.6 percent of all placements, only 10.9 percent were invested in the shares of domestic companies traded on the stock exchange, 9.3 percent of the funds are on time deposits in banks, while custodial accounts 3.3 percent.
Such an asset placement arrangement, in which government securities play a leading role, carries the lowest risk, but the return is correspondingly lower, and after a long period of time interest rates started to rise, it is one of the causes of the negative return in the funds. Namely, previously purchased bonds with a lower interest rate lost their market attractiveness after the issuance of new ones with a higher rate, so the funds had to show this decline in value in their balance sheets.
Experts claim that the funds would be more successful if the legal limit by which only ten percent of funds can be invested abroad, where the capital market is far more developed, was abolished. The Fiscal Council assessed that in the current situation, pension funds have reduced themselves to resellers of government bonds.
A special story Is the fees for managing funds that are paid out of assets, and they are disproportionately high and, as a rule, at the legal maximum of 1.25 percent, although dominant investments in government bonds attract the least operating costs. On this basis, almost 600 million dinars were paid last year alone. In international practice, such high fees are charged by companies with diversified portfolios and higher risk, intended for younger populations where any loss can be corrected during long-term management. In the case of funds that are the counterpart of the domestic ones, with safe investments in government bonds, the fee usually does not exceed 0.4 percent.
Schedule on the market
There are seven voluntary pension funds operating in Serbia, whose assets are managed by four companies, then one custodian bank, five intermediary banks and one intermediary insurance company. 124 persons are employed in management companies. According to the amount of assets, two funds each are in the large and medium group, and their share in that market is 92 percent. The largest fund from those two categories has a market share of 41 percent. The remaining three funds are classified as small, and this arrangement has been constant since 2015.
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