While they were all once part of one bloc and have had to undergo huge changes following the collapse of the Soviet Union, the experience for central and eastern European (CEE) countries in pensions has been highly diverse. Although most have adopted the World Bank pensions model and have also undergone further reforms in recent years, many problems still remain. This was certainly the message at the ‘Pension Funds Forum: A Bright Future' conference in Prague in mid-June'.

Competition between funds is fierce in countries like the Czech Republic, Bulgaria, and Kazakhstan. But pension funds in the still reformless Czech Republic must provide their clients with positive returns every year, which means portfolios are very conservative and heavily dominated by fixed income, and equities remain limited.

This means only one type of portfolio can be offered to clients regardless of their age or preference and long-term returns are rather small, said Petr Benes, CEO and chairman at Czech CSOB Pension Fund Stabilita.

Benes called for change on this issue. He also drew attention to the low contribution by the state towards voluntary third pillar pension funds, which has remained at the same level for a decade, while member contributions have only experienced moderate growth over the same period.

The average age of pension fund clients, at 49, and a participation rate of only 2% of the population present,
a problem for the generation under 30 years of age, while high fees, almost 3% of assets, are not bringing any returns.

And the more saturated the market, the higher the commission pension funds are willing to pay. The growing acquisition costs paid to intermediaries, poor transparency reagarding and International Financial Reporting Standards recognition, Benes added, are further problems.

Russian funds were in strong evidence at the conference, some including pictures of Putin in their Powerpoint slides.

Apart from state pension entities, Russia currently has 289 non-state pension funds, according to Elena Sukhorukova, executive director of non-state pension fund Blagosostoyaniye. She told the conference that other problems are the mentality of its citizens, with only 3% feeling responsible for their own pensions, the absence of a fully formed body of pensions law and the need to adjust taxation.

And Alexey Goncharov, CEO at Russia's interregional non-state Bolshoi, or ‘Big', Pension Fund, said their status of non-profit organisations means that non-state pension funds cannot generate profits at all.

He added that tax exemptions and subsidies to fund pension savings do not exist and that regulatory acts are needed to set up a professional pensions system like that in Kazakhstan. Another barrier to development is that Russian non-state pension funds do not have the opportunity to invest in overseas assets or real estate.

However, Maxim Tishin, senior portfolio manager at UFG asset management, said that the Russian rouble fixed income market should be on every investor's screen, as the rouble rate has managed to curb inflation and a rouble bonds market offers diversified sector exposure.

Despite a high growth of assets, Hungary suffers from disappointing fund performance and high funds costs in international comparison, while the average real net return was a weak 2.9% between 1998 and 2005, compared both to expectations and international levels. Although there are no investment limits in Hungary, portfolios are still conservative, said Istvan Hamecz, CEO of Hungary's OTP Investment Fund.

The pension markets in the three Baltic states are driven by developments in the banking or financial environment but suffer from near invisibility due to their small size in contrast to Russia or Kazakhstan. On top of that, all of the Baltic countries suffer from a falling birth rate, emigration of citizens and a lack of immigration, said Dace Brencena, executive director at SEB Unipensija.

Robert Kitt, fund manager of Hansa Investment Funds, said to determine the relevant asset classes it is important to create synthetic liabilities in order to achieve a benchmark and to find a correlation that did not exist in the CEE markets a few years ago. Kitt also said that due to their small size, the Baltic countries have prudent rules and have had to look at asset classes that match their domestic growth.

Topics