The net assets of four mandatory pension funds at the end of 2015 increased by 7.72 billion kuna compared to the previous year. At the same time, mandatory funds received a total of 5.16 billion kuna from citizens’ contributions last year. Thus, they increased the received contributions by 2.56 billion kuna.
Every now and then, the media starts writing about mandatory pension funds (OMFs), or someone remembers to make statements that payments into the second pension pillar should be frozen or that mandatory pension funds should be abolished. The latest statements came from Ivan Lovrinović, a professor at the Faculty of Economics at the University of Zagreb and a member of parliament from Most, who stated in the media that payments into the second pillar should be frozen because it concerns billions of kuna that would save the state budget. Similar statements were heard during the government of Ivo Sanader when the crisis hit and led to a six-year recession.
We have therefore become accustomed to sporadic negative political statements about the second pillar, but we have rarely heard words in favor of continuing pension reform, greater influence of pension funds on the capital market, and the economy. It is certainly not the goal to favor pension fund managers and take their side, but they all claim that they invest in accordance with strictly defined legal provisions and cannot move even a millimeter. The extent to which pension funds are interested in new investments is also shown by their great interest in the IPO of HAC, which the previous government announced for months but never implemented.
Whether mandatory pension funds in Croatia are successful or not, let someone else prove it. We show the numbers: the net assets of four mandatory pension funds at the end of 2015 amounted to just over 74 billion kuna. This is an increase of 7.72 billion kuna compared to the previous year. At the same time, the four mandatory funds received 5.16 billion kuna from citizens’ contributions last year. Thus, a simple calculation can conclude that they have ‘fertilized’ the received contributions by 49 percent, or increased them by 2.56 billion kuna.
Exposure to Risks
The largest assets among the four OMFs belong to the AZ mandatory pension fund, which managed 29.52 billion kuna at the end of December last year. The second largest is Raiffeisen OMF, which managed 22.63 billion kuna at the end of the year, followed by the PBZ/CO fund with 11.97 billion kuna and Erste Plavi, which had assets of 9.88 billion kuna. According to data from the Croatian Financial Services Supervisory Agency (Hanfa), the best returns were achieved by category A OMFs. Recall that pension funds are divided into three categories – A, B, and C, each differing in investment methods. This categorization was introduced by legal changes a few years ago. Thus, the highest return was achieved by category A funds, among which RBA OMF had a return of 9.69 percent. This is followed by the AZ fund (9.67 percent), PBZ/CO with 8.03 percent, and Erste Plavi category A with a return of 7.22 percent.
– The Law on Mandatory Pension Funds defines the investment limits of each category of mandatory pension fund according to asset classes. Among the most important restrictions, we highlight investments in stocks, which differ depending on the category of the mandatory pension fund (A, B, and C). Thus, the maximum allowed exposure to stocks for category A mandatory pension funds is 55 percent, and for category B, it is 35 percent of the fund’s net assets. Category C funds, according to the Law, cannot have exposure to stocks. We also highlight the currency matching of assets with liabilities, so the minimum kuna exposure of assets for category A funds is 40 percent, for category B funds 60 percent, and for category C funds 90 percent, explains Damir Grbavac, CEO of Raiffeisen Pension Company.
Given that mandatory pension funds have gone through various forms of economic cycles since their inception, the leaders of OMFs can confidently confirm that even in tougher market conditions, they know how to preserve the assets of their members, and also in favorable parts of the cycle, they can take advantage of market opportunities and achieve optimal returns for their members.
– The average annual return from the beginning of operations until the end of 2015 in the AZ mandatory pension fund was 6.02 percent, and the total earnings for members of AZ mandatory pension funds during the same period exceeded 10 billion kuna. The fact that the investment process and management results passed the test of the global crisis of 2008/2009 and the multi-year recession in Croatia is the best answer to possible future crises, which will certainly come; however, they will not undermine the obvious added value created by actively managing the assets of our members, say representatives of AZ pension funds.
Owners and Supervisors
According to Hanfa data, the four OMFs hold about 72 percent of their assets in government bonds. This amounts to 53.85 billion kuna, which is an increase of 13.4 percent, or 6.7 billion kuna compared to the previous year. In shares of domestic companies, OMFs hold about 10 percent of total assets. At the end of last year, this amounted to 7.74 billion kuna, which is a 14 percent increase compared to the previous year. Thus, in absolute terms, this is an increase of 963 million kuna. When looking at the statistical data in more detail, it can be seen that the four OMFs hold shares in a total of 35 companies in Croatia. For years, OMFs have warned that legal restrictions should be reduced and that they should be allowed additional investments in certain companies so that they can have a stronger influence on their operations. For example, during the crisis, investment restrictions based on market capitalization were in force. Thus, OMFs were not allowed to invest in joint-stock companies that were worth less than a certain amount on the stock exchange.
– Funds managed by a single pension company may acquire up to 20 percent ownership in a company listed on a regulated market. More than that can be acquired, but then such an investment must not exceed two percent of the fund’s assets, and the total of such investments can be up to five percent of the fund’s assets. A fund can also invest in shares of a single company up to three percent of its assets, but if the shares of that company are listed on the official market, then it is possible to invest up to 10 percent of the fund’s assets, provided that the total of such investments does not exceed 15 percent of the fund’s assets. Although investment restrictions have been liberalized, due to potential liquidity risks and corporate governance, we generally do not utilize the maximum allowable limits. In our market, only 19 companies have a market capitalization greater than one billion kuna (including Ina, HT, and some others that have a majority shareholder), and pension funds are shareholders in almost all of these companies. Last year, we also took advantage of the opportunity to invest through capital increases in Croatian companies such as Podravka, Luka Rijeka, Tankerska Next Generation, and HPB, emphasize Erste Plavi fund representatives.
Mandatory pension funds have outgrown the Croatian capital market and represent relevant investors on a global scale.
– At AZ, we believe that direct recapitalization of companies can expand investment opportunities in the domestic capital market. In that case, we can also influence the improvement of corporate governance standards, thereby reducing investment risk for our members and increasing asset value. As for market capitalization, that restriction is no longer in force, so we can invest in companies with lower market capitalization, which is particularly evident after the introduction of new categories of mandatory pension funds, emphasize AZ fund representatives.
In addition to ownership, pension funds also have a supervisory role in some companies. Their presence gives investors a certain assurance that such a company will operate more transparently.
– By participating in the supervisory board of a company in accordance with ownership share, we can point out certain poor business decisions and contribute to the management of the company by improving corporate governance standards. Until now, the share in management rights reflected past investment limits (exposure to a single issuer up to 10 percent ownership), and we could not create the business policy of individual companies. The new law that has been in force since August 2014 allowed us to invest in 20 percent of the shares of a single issuer, and in special situations, up to 100 percent. As an example of good work by representatives of pension funds in the supervisory board, we can mention Podravka, which, after a restructuring phase, is recording a significant increase in profits this year, say AZ fund representatives.
Given that a new government has recently been inaugurated, pension funds have certain expectations from the Prime Minister. Damir Grbavac expects support for the further development of pension reform, strengthening the role of mandatory pension funds in accordance with pension reform projections, offering new investment opportunities by launching new infrastructure projects suitable for investments by mandatory pension funds, and privatization. Recently, the sale of shares in Končar, Janafa, Podravka, and others has been reactivated. If the government wants these companies to remain in domestic ownership, it could consider having OMFs buy those shares.
Of course, it is necessary to see whether OMFs can and may participate in such privatization stories considering the law and investment restrictions. If it is necessary to change the legal regulations, why not? The law is not the Holy Scripture and is not carved in stone for all eternity.
