Voluntary pension funds are still healing wounds from the catastrophic stock market of 2022, only two in the plus

The catastrophic stock market year of 2022 continues to trouble most voluntary pension funds, which are unable to erase last year’s losses as 2023 approaches its end. According to data from the Hrportfolio portal, only two voluntary pension funds have managed to offset last year’s losses and also be in the plus for this year. As of November 22, Erste Plavi Expert recorded a growth of 10.4% for 2023 after finishing 2022 with a loss of 4.2%. AZ Profit recorded a return of 9.2%, thus erasing last year’s decline of 6.3%. It is worth noting that in both cases, these are funds that are more exposed to stocks.

Namely, AZ’s ‘volunteer’ invested almost a quarter of its €328.5 million in assets in domestic stocks, with just under seven percent of its assets invested in foreign stocks. Among the riskier securities in AZ’s portfolio, it is worth mentioning that seven percent of the assets are in shares of foreign investment funds, according to the latest October data from the Croatian Financial Services Supervisory Agency (Hanfa). The assets of Erste Plavi Expert are somewhat more modest, at €67.2 million, of which €15.9 million or 23.7% is invested in domestic stocks. In foreign stocks, this fund has €9.8 million or 14.6%, and in foreign investment funds, Erste’s fund managers decided to allocate 13.3% of the assets.

This year’s recovery

The result of such an investment strategy could not be absent, given this year’s performance of the stock markets. The domestic stock market alone – measured by the CROBEXtr index, which accounts for both stock price increases and dividends paid by companies – has brought investors a total return of 25.7% this year. It is also a good year in the foreign market, where investors increasingly believe that the cycle of interest rate hikes by the US and European central banks is over and that the first easing of money can be expected as early as spring next year. In line with such expectations – which are completely contrary to the statements of leading figures from the US Fed – the index of the 500 largest US companies, the S&P 500, has recorded a growth of nearly 19% for 2023, while the European STOXX 600 has strengthened by a significantly more modest eight percent.

The Association of Pension Fund Management Companies (UMFO) states that this confirms what they continuously communicate. – Negative oscillations are possible and are not pleasant, but only a diversified approach to investments and a long-term investment horizon bring sustainable long-term returns – they emphasize from UMFO. Erste Plavi comments that the average annual returns of their voluntary pension funds from the beginning of operations until October 31 of this year were 5.38% in Erste Plavi Expert and 4.20% in Erste Plavi Protect. – We are very satisfied with the high returns we have achieved for our members in 2023 – they stated from Erste Plavi.

Relatively close to erasing last year’s losses are the funds of Raiffeisen and Croatia Insurance. After last year’s five percent loss, Raiffeisen’s fund has recorded a growth of 4.7% for 2023. The CO fund is up 7.8%, but it needs an 8.1% growth to offset last year’s loss of 7.55%. The Croatia Insurance fund named 1000A has recorded more than 10% returns this year, but last year’s loss was deeper, at 10.5%, so it needs this year’s growth of 11.7% to erase it.

Croatia Insurance states that they are extremely satisfied with the returns achieved during 2023 in all funds managed by the company, especially considering the state of the financial markets in the previous year. – As we always emphasize, a long-term investment horizon is crucial for achieving adequate returns and represents one of the most important components of voluntary pension savings – they add from CO.

The other three funds – AZ Benefit, Erste Plavi Protect, and Croatia Insurance 1000C – are still far from erasing the losses for 2022, unless a miracle happens in the global capital markets in the next little over a month. The reason lies in the fact that these three funds are more exposed to government bonds, which performed very poorly last year due to rising interest rates. This year, the bond market is partially recovering from that shock. AZ Benefit has as much as 80% of its assets in domestic bonds and has recorded a growth of 2.8% for 2023 (last year it had a loss of 6.5%). A nearly identical loss was recorded last year by Erste’s fund with 64% of its assets in domestic government debt, and this year it is up 2.45%. Croatia Insurance 1000C is also about 2.5% in the plus while last year it recorded more than four percent loss.

Results of closed funds

Closed voluntary pension funds established by companies for their employees have somewhat greater success. Of the 21 of them – to be precise, 20, as the Arena Mudra pension fund started operations just before last Christmas – 11 have left behind the poor 2022 in the capital markets.

Looking from the start of operations, open voluntary pension funds have achieved an average annual return between 1.8% and 5.5%. On the other hand, the returns of closed voluntary pension funds significantly depend on the start of their operations. The oldest is the ZDMF of the telecommunications company A1, established in early March 2004, and in almost 20 years it has achieved an annual return of 5.9%. Eight funds that started operations between 2005 and 2008 record an average return between 2.94% (Croatia Insurance ZDMF) and 5.83% (the fund of the Croatian Air Traffic Control). Funds established between 2011 and 2019, of which there are nine, record an average annual return from 1.06% (Third Horizon ZDMF) to 5.9% (Erste ZDMF).

UMFO emphasizes that according to independent research by Better Finance, an NGO representing the interests of financial services users in the EU, Croatian voluntary funds are among the best, in terms of real returns over ten-year periods up to 2020 or 2021, but also in terms of real returns over the entire reporting period. Between 2012 and 2021, the return of Croatian ‘volunteers’ was 4.41%, while the first followers are Estonian voluntary funds with a return of four percent. Over the entire reporting period, the return for Croatia is 3.51%, while for funds from other European countries it does not exceed two percent.

Commenting on the performance of their open pension funds since the beginning of operations, AZ states that given the nature of the product and investment strategy, the returns achieved are at levels higher than those expected in the early 2000s when voluntary pension savings were in their infancy. – Despite this sudden jump in inflation in the last little over a year, we believe that returns will remain competitive in the long term. The average annual returns from the beginning of operations until the end of October 2023 were 5.48% in AZ Profit and 4.92% in AZ Benefit – they say from that company.

The annual inflation rate from 2002 to the end of October 2023 is 2.59%, while the nominal return of the Raiffeisen voluntary pension fund reached 4.81%, they say from that company. – The calculation shows that the real return of the Raiffeisen voluntary pension fund during that period is 2.16%, which we consider satisfactory as it is higher than the expected long-term real return of pension funds from the beginning of the reform in 2002 of two percent – they say from Raiffeisen.

Stable growth in the number of members

Although contributions to this type of pension fund are voluntary, their assets have been steadily growing for years. At the end of October, they totaled €959.3 million, which is 9.5% more than at the end of last year. The constant growth of assets is also the result of the steady increase in the number of members.

Hanfa’s data shows that at the end of October, nearly 389,000 members were saving in open voluntary pension funds, which is 3.8% more than at the end of last year. UMFO emphasizes that with various benefits, such as state incentives, tax reliefs, and returns achieved through the management company of voluntary pension funds, savings in the third pension pillar remain the most competitive form of dedicated savings.

– Specifically, the state encourages voluntary pension savings, and the incentive funds amount to 15% of the total contribution paid up to a contribution of €663.61 annually. By paying this amount, the maximum support amount of €99.54 per year is achieved. An undeniable fact is that an increasing number of employers, through voluntary pension savings, stimulate and reward their employees. It is clear that the further increase in members of voluntary pension funds significantly depends on the positive perception of voluntary pension savings by citizens – they emphasize from UMFO.