In 2010, mandatory private pension funds faced difficulties: the decline of yields on fixed-income instruments, combined with the major stock exchange corrections have visibly limited their ability to record high yields.
However, private pension funds are long-term investment instruments, for a period of around 20 years. They have a pre-established investment structure that considers the degree of risk, so every new leu that goes into their accounts is directed based on a strict, pre-established plan.
Contributions paid to mandatory private pension funds amounted to 1.8 billion lei (about EUR416million) between September 2010 and September 2011. About RON1.5 billion were invested in government bonds, meaning 68.7% of the overall RON5.8 billion assets. Last year pension funds placed RON2.5 billion in government bonds, or 64% of the RON3.8 billion assets.
Funds also invested significant amounts in bank deposits. The value of bank deposits placed with pension funds rose by around RON200 million over the past year, in line with the cautious investment strategy adopted.
Gold and mutual funds, although they don’t hold significant shares of pension fund assets, cumulated around RON73 million in assets, whereas in the autumn of last year gold was absent from portfolios, while mutual funds were weakly represented.
The inclusion of gold in the portfolio, an asset that appreciated by as much as 17% this year, shows the intentions of pension fund managers to offset part of the declines recorded by investments in shares through investments in assets not correlated with stock exchanges.
The main stock exchange indexes in the region lost over 20% over the past 12 months because of turbulences generated by the sovereign debt crisis.
Investments in mutual funds, worth around RON70 million, have the role of diversifying the portfolio and of reducing the risk. By investing in a mutual fund, pension funds run a lower risk than that incurred by direct acquisition of shares, but the performance of a mutual fund with exposure to shares is tightly connected to that of the stock exchange.
The sign that pension funds have been more cautious is the lower exposure to external markets, considering that the financial turbulences had to do with the deterioration of the situation in the euro zone. So, at the end of September, the share of pension fund investments in the European Union fell to 11.2% of the assets, compared with 14.7% of assets at the end of September 2010. The decline could have also occurred indirectly, as a result of a decline in the share value.
The mandatory private pension funds’ investments in shares rose over the past year from RON447.7 million to RON638 million at the end of September, although stock exchange indexes lost over 20% of their value. In the short run, investments in shares brought losses to the pension funds, but considering that the funds have to pay pensions in 20 years, there is a potential for equity markets to go through several cycles of rises during this interval.
Mandatory private pension funds exceeded 5.4 million contributors at the end of September, for whom they manage RON5.8 billion in assets. At the end of September the highest yield was recorded by BCR’s pension fund, of 10.4%, followed by Generali with 9.8%. Allianz-Tiriac ranks third, with an annualized yield of 9.7%. (EUR1=RON4.3308)
(English version by Daniela Stoican)