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The crisis melted down 9 billion Euros from the CEE pension funds

The first signs of the current financial crunch emerged in July 2007 on the subprime mortgage loans market in the United States of America. Meanwhile, the effects of the crisis became visible overseas as well and started to affect all financial markets, bringing the collapse of stock exchanges and causing losses of hundreds of billion Euros for large and small investors alike. As usual in times of crisis, risk appetite plunged, further worsening the precarious state of the world's stock exchanges. The private pension funds were not spared by the effects either: during the first year alone, the financial crunch caused losses in excess of 9 billion Euros for the private pension funds across Central and Eastern Europe.

The private pension funds across Central and Easter Europe (CEE) sustained losses of 9 billion Euros between July 2007 and July 2008, due to the global financial crunch, according to an assessment conducted exclusively by PRIMM Insurance&Pensions Magazine. The losses translated into a decrease and depreciation of net assets under management and were mainly caused by the collapse of the stock exchanges where the respective funds placed their investments. The 9 billion Euros represent almost 13% of the total assets managed by the private pension funds in the CEE region.

The assessment included all ten Central and Eastern European states that applied multi-pillar private pension systems (the World Bank's model, implemented in Romania as well, as of last year): Poland, Hungary, the Czech Republic, Bulgaria, Croatia, Slovakia, Slovenia and the three Baltic States: Estonia, Lithuania and Latvia. Together, the private pension funds (both mandatory - 2nd pillar and voluntary - 3rd pillar) from these countries currently manage approximately 70 billion Euros worth of assets. The assessed period included the 12 months between July 2007 and July 2008 (Q3, Q4 2007 and Q1, Q2 2008).

Out of the total losses of 9 billion Euros, Poland, the largest among the private pension market in this region, accounts for the most significant part: 6 billion Euros. Ranking second we have the private pension funds from Hungary (the region's second largest market), which sustained losses in excess of 2.2 billion Euros; and ranking third we have the pension funds from the Czech Republic (the region's largest voluntary pension market), with losses of 210 million Euros. Thus, the region's three largest private pension markets concentrated 93% of the losses sustained by the region's private pension funds.

Poland: size does matter

Poland's mandatory private pension market is the largest in this region, with almost 14 million participants and net assets under management in excess of 40 billion Euros. But Poland paid a price in exchange for its large size, with matching losses caused by the global financial crunch: 5.98 billion Euros is that price, of which 5.95 billion Euros in the mandatory private pension funds (2nd pillar) and 30 million Euros in the voluntary pension funds (3rd pillar).

By mid 2007, the Polish mandatory funds managed net assets of 138.3 billion zloty (42 billion Euros). By mid this year, the assets dropped to 136.4 billion zloty (41.8 billion Euros), although the funds were fueled with contributions in the meanwhile, contributions that amounted to a total value of 18.9 billion zloty (5.75 billion Euros). Therefore, the total loss sustained by the mandatory private pension funds reached 5.95 billion euros, namely in excess of 14% of the current asset value. In other words, the stock exchange losses melted down the equivalent of a one year-saving in this system, bringing the assets down to the level from mid 2007.

During the same period, namely from June 30th 2007 until June 30th 2008, the Warsaw Stock Exchange, where the Polish mandatory pension funds placed about one third of their assets (the maximum level allowed by the legislation is 40% of assets), lost 38% of the value. According to the Polish legislation, the pension funds are not allowed to invest more than 5% of their assets abroad (a provision that the European Commission has now requested the Polish authorities to eliminate), thus making the funds captive on the domestic market, therefore unable to be spared by the stock exchange losses. The only strategy available for the Polish pension funds was the passive reduction of the exposure on shares: the funds reduced dramatically their acquisition of shares, and the value of the securities from the portfolios went down, given the generalized fall of the Warsaw Stock Exchange. The result? In just one year, the exposure on stocks of the mandatory pension funds went down from 38.5% (by mid last year) to 28.9% (by mid this year).

However, the losses were perfectly proportional with the size of the funds and their stock exchange exposure. Considering the 38% loss of the capital market and the 38.5% exposure of the mandatory pension funds at the stock exchange when this period started, the resulting loss would be approximately 14.6% - identical with the actual one, therefore we can conclude that the losses of the pension funds are 100% explained by the poor conditions of the capital market. In fact, the mandatory pension funds in Poland are the region's most risk-oriented when it comes to investments in shares, and the massive losses were a matching price for the risk undertook by the funds.

The massive losses of the Polish mandatory pension market are also obvious by calculating the returns of the funds between 30th of June 2007 and 30th of June 2008. The average weighted return of the market was -13.4%, with funds losing between 12.1% and 19.2% of the fund unit value. Actually, after the first eight months of this year, the average return on the market, compared to December 31st 2007, was -8.4%, thus the Polish mandatory funds standing all chances to end this year in the red for the first time in their ten year history (started in 1999).

On the voluntary private pensions side, the Polish market is much less developed, therefore the voluntary pension funds on this market lost only 30 million euros.

Hungary: second on the list of losses

Hungary ranks second in the region, both in terms of size of the mandatory private pension markets (behind Poland), and of voluntary pensions (behind the Czech Republic) and it also comes second according to losses. The mandatory private pension funds from Hungary manage assets of approximately 7.5 billion Euros and have almost 2.9 million participants, while the voluntary pension funds manage almost 3 billion Euros and have 1.4 million participants.

The losses of pension funds from Hungary totaled 2.12 billion euros in the first year of financial crisis, split as follows: 1.49 billion Euros in the mandatory funds and 722 million Euros in the voluntary funds. In proportion with the assets volume, the losses from Hungary were more obvious than in Poland: in Hungary, the losses of 2.12 billion Euros represent 20% of total net assets under management, while in Poland the share of losses was 14%.

On the other hand, the Hungarian funds had a lower exposure on shares than the Polish funds, and the Budapest Stock Exchange dropped by only 30% in this reference period, compared to 38% in the case of the Warsaw Stock Exchange. But how can we explain the fact that losses on the Hungarian market are higher (20% compared to 14%), in terms of managed assets?

The answer lies in the investment strategy adopted by the funds: while Polish funds reduced their exposure on shares during the first year of the crisis (from 38.5% to 28.9%), the Hungarian mandatory funds considerably increased their investments in shares, from 10.7% to 17.1% (at the end of the first quarter in 2008) and even more, subsequently. This indicates that the Hungarian funds viewed the crisis as an opportunity to accumulate shares at low prices, with the funds' exposure on listed shares increasing actively. The "courage" to take on this strategy comes from the lack of legislative restrictions: mandatory funds no longer have to follow (since 2002) any guaranteed minimum return requirements (like in Poland), therefore they are free to undertake investment risks during the crisis and not only.

Meanwhile, the voluntary funds proved to be surprisingly more conservative and decided to maintain their stock exchange investments at 9%-10% (or even below) during the entire reference period. The losses of the Hungarian private pension market are visible in return terms as well: the funds (mandatory and voluntary alike) went in the red during the third quarter, namely immediately after the start of the crisis, and continued to sustain losses up until now. The mandatory funds lost 7.83%, and the optional funds lost 6.33% in Q1 2008 alone.

The Czech Republic, third in terms of losses

The Czech Republic is the region's largest voluntary private pensions market, with over 4.1 million participants and assets amounting to almost 7.4 billion euros - comparable in assets with the mandatory pension market from Hungary. Nevertheless, the Czech market (which does not have a mandatory, 2nd pillar component) only lost 210 million Euros in the first year of the crisis, compared to the losses in the Hungarian mandatory pensions market, which were 7 times higher.

There are multiple explanations for this substantial difference. First of all, the Czech legislation makes it binding for the funds to obtain positive annual returns - otherwise, the pension companies must compensate the deficit from their own sources. Although they got positive returns, the Czech funds sustained relative losses of assets: the assets went up at a slower rate than the volume of contributions brought in the system - the difference being the 210 million Euros in losses. Secondly, the Prague Stock Exchange lost only 18.7% during the reference period (compared to 38% on the Polish one, and 30% on the Hungarian one). Thirdly, the Czech funds are the most conservative in the region (which is also determined by the legislative provision mentioned in the first point), investing less in shares.

The exposure of the Czech funds on listed shares was only 7.1% by mid 2007 and 4.9% by mid this year, thus leading to lower losses.

The other states: still in the red, but by less

The assessment indicates that all types of pension funds in the region, either mandatory or optional, sustained losses of assets as a result of the financial crunch. From the total losses of 9 billion Euros, Poland lost 66.4%, Hungary 24.6%, the Czech Republic 2.3%, and these three together sustained 93.3% of the regional losses. The rest of the funds, from countries with far less developed private pension markets, also suffered less losses: Slovakia had losses estimated to 195 million Euros (of which 115 million Euros on the 2nd pillar), Croatia - 146 million Euros (of which 135 million Euros on the 2nd pillar), Bulgaria - 95 million Euros (of which 45 million Euros on the 2nd pillar), Slovenia - 80 million Euros and the Baltic States, approximately 100 million Euros (of which 65 million Euros in Estonia alone).

The conclusion? The private pension funds throughout the region were affected by the world's financial crunch, no country or financial market was spared the collapse of stock exchanges. However, certain funds saw an investment opportunity in the crisis and were buyers of stocks, while others avoided the stock exchanges and stayed away from shares. Who was right? Only time and the much-expected comeback of the stock exchanges will tell.

Losses: 5.98 billion Euros
(5.95 billion Euros in mandatory funds, 30 million Euros in voluntary funds)
Assets under management: 42 billion Euros (mandatory funds)
Participants: 13.7 million (mandatory funds)
The largest private pensions market in Central and Eastern Europe. The funds have the highest exposure on shares and consequently lost more because of the fall of stock exchanges. The loss equals 14% of current net assets under management, namely one full year of savings in the private pension system. The legislation imposes a guaranteed minimum return (compared to the market average) and bans investments higher than 5% outside Poland.

Losses: 2.112 billion Euros
(1.49 billion Euros in mandatory funds, 722 million Euros in voluntary funds)
Assets under management: 7.5 billion Euros (mandatory) + 3 billion Euros (voluntary)
Participants: 2.9 million (mandatory) + 1.4 million (voluntary)
The region's second largest pensions market. The funds chose to buy even more shares, in a context of a fall down in stock exchange markets; therefore losses were higher, expressed in percentage points of total assets. The value of losses is 20% from the system's existing assets. Current legislation does not limit the funds' investments as in Poland (there is no limit for investments in shares and no requirements for a guaranteed minimum return, and the threshold for investments abroad is 30%), thus the funds were more willing to assume investment risks.

Losses: 210 million Euros
Assets under management: 7.4 billion Euros
Participants: 4.1 million
The region's largest voluntary pensions market, third in the region in terms of mandatory pensions plus voluntary pensions. The Czech Republic does not have a mandatory pension 2nd pillar component, but its voluntary pensions market is perfectly comparable in size with the Hungarian mandatory pensions market. Nevertheless, in the first year of crisis, the voluntary funds in the Czech Republic lost seven times less money than the mandatory funds from Hungary, and this happened for several reasons (legislative, market-related and investment strategy). The Czech funds are among the most conservative in the region, in terms of investment policy.

Losses: 195 million Euros
(115 million Euros in mandatory funds, 80 million Euros in voluntary funds)
Assets under management: 2 billion Euros (mandatory) + 800 million Euros (voluntary)
Participants: 1.6 million (mandatory) + 800,000 (voluntary)
At the moment, it is the only country that fully applied the multi-fund system for mandatory private pensions. Each company is managing three funds instead of one, with different investment risk profiles. The dynamic funds, with higher exposure on listed shares, were most affected by the crisis, while conservative funds sustained smaller losses. Slovakia is the region's third largest optional pension market, behind the Czech Republic and Hungary, and the fourth largest mandatory pension market, behind Poland, Hungary and Croatia.

Losses: 146 million Euros
(135 million Euros in mandatory funds, 11 million Euros in voluntary funds)
Assets under management: 3.19 billion Euros (mandatory) + 124 million Euros (voluntary)
Participants: 1.45 million (mandatory) + 136,000 (voluntary)
Croatia is one of the private pension markets that lost least in the financial crunch. The losses of mandatory private pensions funds, although rich in absolute volume (135 million euros), represent only 4%-5% of total managed assets, in a context where funds invest approximately one fifth of their assets in listed shares. The losses were less obvious (in managed assets terms) on the voluntary pensions market, where the 11 million Euros lost represent 9% of the total money managed by the funds.

Losses: 100 million Euros
(of which Estonia accounts for 65 million Euros)
Assets under management: 1.7 billion Euros (mandatory) + 200 million Euros (voluntary)
Participants: 2.45 millions (mandatory) + 200,000 (voluntary)
The private pension markets from the Baltic States (Estonia, Lithuania, Latvia) are the region's smallest markets, firstly because of their demographics. The total losses of the private pensions industry from these states, after one year of financial crunch, are roughly estimated at 100 million Euros, of which Estonia, the largest private pensions market among the three countries, sustained losses of 65 million Euros.

Losses: 95 million Euros
(45 million Euros in mandatory funds, 50 million Euros in voluntary funds)
Assets under management: 903 million Euros (mandatory) + 318 million Euros (voluntary)
Participants: 2.94 million (mandatory) + 605,000 (voluntary)
In Bulgaria, the private pension funds sustained total losses of 95 million Euros in the first year of financial crunch, an amount representing only 8% of net assets under management. The voluntary pension funds, although three times smaller in size in terms of managed assets, compared to the mandatory private pension funds, sustained higher losses than the latter because of the more aggressive investment policy. The investment legislation is more permissive for the voluntary funds, with a higher exposure on shares, therefore faced with bigger losses than the mandatory funds.

Losses: 80 million Euros
Assets under management: 1.2 billion Euros + 50 million Euros (voluntary)
Participants: 500,000 (mandatory) + 30,000 (voluntary)
Just like the Baltic States, Slovenia has one of the smallest private pension market in Central and Eastern Europe. The industry's total losses are estimated at 80 million Euros, namely 6%-7% of the total net managed assets. The mandatory private pension market sustained most of these losses, being much more developed than the voluntary private pensions segment.


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