Pension Funds Supervision Department VOLUNTARY PENSION FUNDS SECTOR IN SERBIA First Quarter Report June 1
National Bank of Serbia Content: 1. Introduction... 3 2. VPF operations... 7 2.1. Market participants... 7 2.2. VPF net assets... 8 2.3. Structure of VPF assets... 9 2.4. VPF securities trading... 10 2.5. Fees charged by management companies... 11 2.6. Transaction costs... 12 2.7. Number and structure of VPF users... 13 2.8. Contribution payments, withdrawals and transfers... 15 3. Conclusion... 18 2
CPI RSD/EUR exch. rate Key policy rate BELEX15 Net assets FONDex Supervision of voluntary pension fund management companies 1. Introduction After more than five years of their operation, voluntary pension funds (VPFs) have recorded a Since the start of VPF constant rise in net assets that amounted to RSD operation, net assets have been on a continuous rise. 13.42 bln by end-. Relative to the quarter earlier, net assets grew 7.8%, or 28.6% over the last year. 16,000 Movements in net assets, FONDex and key indicators since the start of VPF operation (in RSD mln, units, %) 1,600 14,000 12,000 10,000 8,000 6,000 4,000 2,000 1,500 1,400 1,300 1,200 1,100 1,000 0 IV I II III IV I II III IV I II III IV I II III IV I II III IV I 2006 900 3,300 1,800 300 18% 13% 7% 120 95 70 16% 9% 2% Source: National Bank of Serbia, Belgrade Stock Exchange, Statistical Office. 3
National Bank of Serbia At end-, FONDex 1 reached 1,526.6 points 2. The return of FONDex, which represents the weighted average of all funds return, came at 3.8%, while the return for the last year measured 8.2%. 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 3, increased by 6.59% in (the index value was 531.93). The rise was recorded for the first two months of, while a sharp drop initiated in March continued in Q2. At end-march, BELEX15 lost 30.1% over a year, or 45.7% by end-may. Liquidity on the BSE remained low. Trading volumes in equalled RSD 5.42 bln, which is a decline relative to the previous quarter (RSD 6.33 bln) and the same period last year (RSD 9.41 bln). Measured by the number of transactions, activity on the BSE contracted again. At end-, the return on frozen FX savings bonds ranged from 5.43% tо 5.95% depending on maturity, apart from A-series with a 8.07% return, which is usual for series nearing maturity. In the last quarter, the yield curve shifted mildly up. 8.50% 8.00% 7.50% Yield curve on frozen FX savings bonds (end-of-quarter) 7.00% 6.50% 6.00% 5.50% Q4 2011 Q3 2011 Q2 2011 5.00% 4.50% 4.00% A A2013 A2014 A2015 A2016 Source: Belgrade Stock Exchange. The primary market of government debt instruments (T-bills and government bonds) experienced again a sharp increase in the volume of issues, while discount rates 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 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. 4
Supervision of voluntary pension fund management companies slightly declined for most maturities relative to the previous quarter. Five-year dinar bonds appeared for the first time, worth RSD 3 bln nominally and with 90.1% performance. The total market value of dinar-denominated issues came at c. RSD 76.73 bln vs. RSD 31.40 bln in Q4 2011. In the whole 2011, the total market value of issues was RSD 277.5 bln. In, most issued were 1-year (26.34 bln) and 3-year bills (17.12 bln). Return (discount rate) of issued dinar-denominated government debt instruments, by maturity (in %) Maturity 2011 Q2 2011 Q3 2011 Q4 2011 3m 13.00% 11.95% 11.90% 11.60% - 6m 13.00% 11.90% 11.90% 10.85% 10.48% 12m 13.00% 12.50% 13.00% 13.00% 12.69% 18m 12.60% 12.69% 13.30% 13.30% 13.10% 24m 12.89% 12.99% 12.99% 13.25% 13.49% 36m 14.05% 13.89% 14.89% 14.89% 14.70% 60m - - - - 14.70% Source: Ministry of Finance. Market value of issued dinar-denominated government debt instruments, by maturity (in RSD bln) Maturity 2011 Q2 2011 Q3 2011 Q4 2011 3m 17.3 16.7 9.7 3.9-6m 15.9 13.2 14.7 10.9 14.1 12m 19.2 39.3 16.5 8.9 26.3 18m 21.4 18.4 6.9 3.9 5.1 24m 13.3 8.0 4.4 2.1 11.9 36m 2.1 4.8 4.5 1.7 17.1 60m - - - - 2.3 Total 89.1 100.3 56.7 31.4 76.7 Source: Ministry of Finance. In the quarter under review, returns to maturity for dinar instruments recorded a moderate decline from the previous quarter (from 19 tо 37 basis points), apart from 2- year instruments which rose by 24 basis points. 5
National Bank of Serbia Yield curve on government dinar debt instruments (end-of-quarter) 16.00% 15.00% 14.00% 13.00% 12.00% 11.00% Q4 2011 Q3 2011 Q2 2011 10.00% 3m 6m 12m 18m 24m 36m 60m Source: Ministry of Finance This period also saw the issue of euro-denominated government debt instruments worth c. RSD 102 mln 1-year (RSD 52 mln) with a 5.95% rate and 2-year (RSD 49.7 mln) with a 6.10% rate. The depreciation trend which started by end-2011 continued into. In, the dinar depreciated by 6.4%, or 7.5% over the last year. As more than a fifth of fund assets (22.5%) were invested in euro-denominated financial instruments, the euro s appreciation drove up the funds return in this period. The trend of a slowdown in inflation, initiated in mid-2011, continued through. Annual CPI rose by 5.6% in January, 4.9% in February and 3.2% in March, while monthly price growth rates settled at 0.1%, 0.8% and 1.1% respectively. In response to receding inflationary pressures, the key policy rate was cut further in to 9.50% by end-march, down by 25 basis points on end-q4 2011, or down by 275 basis points on end-march 2011. 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 (25 basis points). 6
Custody banks Supervision of voluntary pension fund management companies 2. VPF operations 2.1. Market participants At end-, the VPF market comprised 6 companies managing 9 VPFs, 3 custody banks and 4 agent banks 4. VPF market participants National Bank of Serbia Societe Generale banka Srbija Raiffeisen Future Dunav Komercijalna banka DDOR Garant DDOR Garant Dinar Soc. Gen. Ekvilibrio Brokers Central Securities Depository Unicredit Bank Srbija Delta Generali Index Soc. Gen. Štednja Triglav penzija Delta Generali Basic Stock Exchange Securities Commission At end-, total employment in VPF management companies was 160, up by 12 and 33 q-o-q and y-o-y respectively. 4 NLB banka a.d. Beograd, Raiffeisen banka a.d. Beograd, Volksbank a.d. Beograd and Société Générale Banka Srbija a.d. Beograd. 7
National Bank of Serbia 2.2. VPF net assets At end-, net assets totalled RSD 13.42 Net assets reached RSD 13.42 bln bln, up by 7.8% q-o-q or 28.6% y-o-y. Furthermore, and contribution payments RSD RSD 658.1 mln were paid to members individual 658.1 mln. Concentration in the accounts, which impacted most on net assets growth. sector remains high. Total contributions, net of contribution fees, came to RSD 643 mln, whereas withdrawals amounted to RSD 157.4 mln. Total fees charged by companies were RSD 79.3 mln. End-of-period net assets of the VPF sector (in RSD bln) 3.05 4.64 7.19 9.86 12.45 13.42 10,000 10,000 End-of-quarter sector concentration (Herfindahl Hirschman Index) 8,000 6,000 4,000 2,000 5,142 3,752 3,311 3,110 2,832 2,754 2,711 2,634 2,818 2,862 2,839 3,523 3,196 2,920 2,788 2,755 2,681 2,606 2,866 2,849 2,826 0 IV I II III IV I II III IV I II III IV I II III IV I II III IV I 2006 Measured by HHI, market concentration in the sector 5 was relatively high 2,826 points at end-. What also attests to high market concentration are 2 funds classified as large and 2 as medium, making up over 96% of the market, while the largest fund accounted for c. 41% of total net assets. 5 In terms of the share in total net assets. 8
Supervision of voluntary pension fund management companies Number of funds by groups divided by market share (in units) Share in net assets (%) Large (20 and above) 3 2 2 3 2 2 Medium (5-19,99) - 2 3 1 2 2 Small (0-4,99) 4 6 5 4 5 5 2.3. Structure of VPF assets In, government debt securities accounted Most funds were invested in for the major portion of VPF assets 83.6%, of government instruments; 22.5% of which T-bills made up 34.3%, frozen FX savings assets were in foreign currency. bonds and government bonds 49.3%, term deposits 5.9%, shares 5.3%, demand deposits 3.8%, and property 0.7%. Structure of VPF assets (end-of-quarter) Property 0.65% Foreign bonds 0.00% Corporate bonds 0.76% Term deposits 5.88% Transaction accounts 3.76% Receivables 0.03% Shares - BSE Prime market 4.15% Shares - other BSE markets 1.18% Frozen FX savings bonds 9.08% Government bonds* 40.26% Treasury bills 34.25% 9
National Bank of Serbia The greatest change in the structure of VPF assets was recorded for T-bills their share in the portfolio rose by 14.7 percentage points (from 25.6% to 40.3%). In the same period, the share of government bonds fell by 6 percentage points (from 40.3% to 34.3%). A significant decline was also noted for demand deposits 6.3 percentage points (from 10% to 3.8%) and term deposits 2.3 percentage points (from 8.2% to 5.9%). The share of assets denominated in euros was RSD 3 bln or 22.5% of total assets, while dinar-denominated assets accounted for RSD 10.7 bln or 77.5%. The share of euro assets has been gradually declining since early 2011 in the period under review, the total decline was 17.2 percentage points (from 39.7% to 22.5%). The major part of assets over 90%, 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. 2.4. VPF securities trading VPF trading volumes equalled RSD 4.42 bln in. Government debt instruments had the major share in securities purchases. The maturity to sale ratio changed significantly relative to the quarter earlier, settling at 75 : 25 in favour of sale. The share of VPFs in BSE trading was around 2%. Trading volumes came at RSD 4.42 bln. Auctions of government securities had the largest share. VPF securities trading (in RSD bln) 2008 2009 2010 2011 Securities trading 1.51 12.59 14.92 19.34 4.42 Purchases 1.07 8.12 8.12 10.6 2.95 Belgrade Stock Exchange 0.78 0.40 1.29 0.65 0.06 Unregulated market 0.25 0.38 0.30 1.30 - Auctions of government securities 0.03 7.34 6.53 8.64 2.89 Sales 0.39 0.39 0.76 3.81 1.10 Belgrade Stock Exchange 0.09 0.05 0.56 0.43 0.05 Unregulated market 0.30 0.34 0.2 3.38 1.05 Maturity 0.05 4.08 6.05 4.94 0.37 Purchase to sale and maturity ratio 2.42 1.82 1.47 1.21 2.02 Share in total BSE trading (in %) 1.20% 1.10% 7.60% 3.80% 2.10% Source: National Bank of Serbia, Belgrade Stock Exchange. 10
Supervision of voluntary pension fund management companies 2.5. 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% Management fees will be limited to 1.25% after net assets of all funds reach 0.75% of GDP. respectively, while the account transfer fee may be charged only at the level of real transfer costs. The new Law, adopted in early May 2011, 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. VPF net assets currently account for c. 0.42% of GDP. 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 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 2.10%. 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. Fees charged by management companies (in RSD mln) Contribution fee 43.5 56.9 54.9 59.3 57.9 15.1 Management fee 33.4 72.2 117.2 170.6 220.0 64.2 11
National Bank of Serbia 2.6. 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, costs incurred by management companies accounted for 77% and those incurred by funds 23% of the total. 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. Late 2011 experienced a steep fall in transaction costs. Such trend continued in early. Amount of transaction costs (in RSD mln) Total 10.0 5.3 7.4 9.7 7.0 1.3 Brokerage fees 4.5 2.2 3.8 4.5 2.9 0.6 Custody bank fees 1.8 1.5 2.0 2.4 2.2 0.4 Stock exchange fees 1.6 0.8 0.4 1.1 0.8 0.1 Central Securities Depository fees Transfer tax relating to the acquisition of securities 1.0 0.6 1.2 1.5 1.1 0.2 1.1 0.2 - - - - 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, at end-2011. 12
Active users Supervision of voluntary pension fund management companies 2.7. Number and structure of VPF users At end-, 175,796 6 of users were in the accumulation phase 7. Total membership contracts 8 stood at 235,787. At the same time, 21 users holding 30 membership contracts, who are currently in the contracts saw and around 1,400 1,000 new membership new users. contracts and around 900 new users. withdrawal phase, are receiving scheduled payments. All information from this point onwards, unless specified otherwise, refers to users in the accumulation phase. In the 2008 2011 period, the strongest growth in the number of new users was recorded in 2009 and 2011 (close to 9,000 and 8,000), while 2010 saw a marginal increase. The upward trend continued in early. Number of contracts and users (in thousand) No. of contracts 158.5 201.6 215.7 220.4 234.4 235.8 No. of use - 9 156.0 165.2 166.8 174.9 175.8 Percentage of active users 10-41.1% 34.9% 33.6% 35.1% 35.5% (in %) As the percentage of active members ranges between 30% and 35% (within a month), and is broadly unchanged since 2009, we can assume that the majority of these users contribute to pension funds each month. Structure of users by payment dynamics (in units and %) Period No. of users Share (%) 1 month 62,420 35.5% 3 months 68,070 38.7% 6 months 71,422 40.6% 12 months 75,033 42.7% 6 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. 7 VPF membership has two phases the accumulation phase (when contributions are made) and the withdrawal phase (when funds accumulated are withdrawn). 8 The number of membership contracts is the sum total of individual membership contracts and the number of members of all pension schemes. 9 Data on the number of users are available as of June 2008. 10 The percentage of active users is the average percentage of active users per month in the relevant period. 13
National Bank of Serbia From the start of membership (1) 148,600 84.5% No holdings (2) 27.196 15,5% Total (1+2) 175.796 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 somewhat above RSD 90,000 and is constantly rising. 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 hold on average six times more funds in their accounts. Average accumulated funds at the period-end (in RSD thousand) - 11 34.6 52.2 70.5 84.5 90.3 At end-, the number of members of 2 or more VPFs amounted to 34,683 or close to 20% of the total. Number of users by number of funds in which they are members (in units) Number of users by membership contract (in units) No. of funds No. of users No. of contracts No. of users 1 141,113 1 129,607 2 24,412 2 34,039 3 10,207 3 10.862 4 53 4 964 5 11 5 287 6 34 7 3 11 Data on the average amount of accumulated funds are available as of June 2008. 14
Supervision of voluntary pension fund management companies Distribution of users and accumulated funds by age (in units, RSD) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 0-9 10-19 20-29 30-39 40-49 50-59 60+ No. of users 79 181 11,967 49,536 57,767 45,866 10,365 Amount of funds (mln) 0.68 3.25 496.96 3,707.65 5,105.13 3,573.79 518.20 Average holdings 8,608 17,956 41,528 74,848 88,375 77,918 49,995 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 over 50% women. At end-2011, the average age of VPF users was close to 44 years, while users aged 30 50 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 withdrawal of funds (53 years under the old Law) was largely similar to earlier years and accounted for approximately 20% of the total. 2.8. 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 were stable at around RSD 660 mln. In 2011, contributions into VPFs amounted to around RSD 660 mln. Total contributions (in RSD bln) 1.52 2.41 2.22 2.43 2.53 0.66 15
National Bank of Serbia 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. In, of total contributions, individual payments accounted for c. 18%, employer contributions 31% and pension schemes c. 51%. This ratio has been broadly unchanged since 2008. 800 Volume and structure of total contributions (in RSD mln, %) 3,000 700 2,500 600 500 400 300 200 100 0 50,9% 29,6% 19,4% 48,0% 34,0% 18,1% 48,9% 32,7% 18,5% 2011 Q2 2011 Q3 2011 Q4 2011 45,6% 36,2% 18,3% 51,0% 30,7% 18,3% 2,000 1,500 1,000 500 Individual payments Employer contributors Pension schemes 0 26,3% 49,1% 44,6% 33,4% 44,0% 48,0% 36,7% 33,6% 22,0% 24,5% 19,3% 18,4% 48,2% 33,3% 18,5% 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. 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. In, withdrawals by eligible members amounted to over RSD 157 mln. The future period is likely to see an increase in scheduled and other 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%. 16
Supervision of voluntary pension fund management companies Total withdrawals (in RSD mln) 141.4 384.6 448.5 458.1 517.6 157.4 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, contributions exceeded withdrawals by c. RSD 500 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 Inter-fund transfers amounted to member may transfer a part or all of his/her assets c. RSD 3.6 mln in. from one fund to another, thereby covering only the real transfer costs. The largest transfers were recorded in 2008. In H2 2011, 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. The trend continued in early when interfund transfers equalled around RSD 3.6 mln. Total inter-fund transfers (in RSD mln) 19.5 235.1 141.5 216.1 165.9 3.6 17
National Bank of Serbia 3. Conclusion 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. In 2010 and early 2011, long-term dinar and FX T-bills were issued, as well as 2026-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. Shares of Telekom Srbije are expected to be listed soon. Corporate bonds of Société Générale bank were issued in. The issue of other bonds was also announced. 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 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. 18