1 / 18

PENSION FUNDS IN UKRAINE AND THEIR INVESTMENT OPPORTUNITIES

PENSION FUNDS IN UKRAINE AND THEIR INVESTMENT OPPORTUNITIES. SERGEY VARFOLOMYEYEV Consultant on Investment Issues USAID/PADCO Ukraine Pension Reform Implementation Project Prepared for the Roundtable “New Investment Challenges in Pension Insurance” Sofia, Bulgaria 15 April 2004.

tlusk
Télécharger la présentation

PENSION FUNDS IN UKRAINE AND THEIR INVESTMENT OPPORTUNITIES

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. PENSION FUNDS IN UKRAINEAND THEIRINVESTMENT OPPORTUNITIES SERGEY VARFOLOMYEYEV Consultant on Investment Issues USAID/PADCO Ukraine Pension Reform Implementation Project Prepared for the Roundtable “New Investment Challenges in Pension Insurance” Sofia, Bulgaria 15 April 2004

  2. ECONOMIC OVERVIEW(2003) • GDP: ~ US$ 50 billion, ~ US$ 1050 per capita; real growth – 9.3%, over 2000-2003 – 32.3% • Industrial output grew by 15.8% (main drivers: construction, manufacturing - >20%, machine-building - 36%) • CPI inflation: 8.2% • Budget deficit: 0.2% of GDP • Public debt: US$ 14.6 billion (~ 29.5% of GDP), of which US$ 10.7 billion – external, US$ 3.9 billion – internal • “Risk-free” rates: 3-6 month - ~ 9%, 2-year government bond yield – 11.5% (at auction); but – can’t be called “benchmarks” • Impressive growth of individuals’ bank deposits: 68.2% (67.9% in 2001, 71% in 2002), total amount as of 1/01/2004 exceeds US$ 6 billion (>12% of GDP)

  3. FUNDED PILLARS’ STATUS • The Law On Mandatory State Pension Insurance (1st & 2nd pillars) and the Law On Non-State Pension Provision (voluntary 3rd pillar) were passed in June 2003 and became effective on 1/01/2004 • 2nd pillar: Singapore model (administration – by Pension Fund of Ukraine, but asset management, custodianship, audit – selected by public tender); most likely contributions will start on 1/01/2007 (a lot of preconditions should be met) and will be 7% of wages; separate Law on mandatory occupational pensions must be developed and passed till 2005 – employers of individuals working under labor categories I and II will make mandatory contributions to 3rd pillar funds • 3rd pillar: only funded DC schemes, return guarantees are prohibited; still no Non-State Pension Fund (NPF) created; Financial Services Commission and Securities Commission actively develop necessary rules and regulations but the most are still absent (asset valuation & unit pricing, personified & financial accounting, fees & costs, disclosure, some other); law on EET model with 15% level of tax-free contributions not passed yet (now tax preferences for life insurers only)

  4. INVESTMENT LIMITS And no prudent-man-type or other prudential investment regulations in the Laws

  5. PROHIBITED INVESTMENTS • Securities not listed at registered stock exchanges or OTC trading systems (for NPFs – except for government securities municipal securities and securities guaranteed by third parties) • Securities issued by collective investment institutions (CII), but for NPFs – Securities Commission may lift this ban • Bills of exchange, promissory notes • Derivative securities (even for hedging purposes – despite allowing significant foreign investments) • Securities issued by affiliated entities (administrator, asset manager, custodian, auditor, investment consultant, etc.); but self-investment is allowed for corporate NPFs – 5% (10% during first 5 years)

  6. THIRD PILLAR FUNDS:TYPES & GOVERNANCE STRUCTURE • Types of NPFs: 1) open PFs; 2) corporate PFs (founders - employer or a group of employers, participants - individuals who have/had an employment relationship with contributing employers); 3) professional PFs (founders - association of employers or individuals incl. trade union associations, participants - individuals related on the basis of professional activities) • Governing body: board of the pension fund (fund board) - at least 5 persons elected for 3 years by the assembly of the founders of the NPF (no representation of participants) • All key services – administration, asset management, custodianship – are contracted out by fund board (but sole founder of a corporate PF can make a decision on self-administering the fund) • Contributors conclude pension contracts with administrator • Administrator & asset manager can be combined in 1 entity and may have the same founders as their NPF(s)

  7. PENSION FUNDS & ASSET MANAGERS:THEORETICAL DEVISION OF RESPOSIBILITIES • Pension fund responsibilities: - analysis of participants’ needs (age, income, wealth distribution, etc.) - choice of fund structure (single fund or several sub-funds, number of mandates per fund/sub-fund – but the Law is vague about possibility of sub-funds) - choice of risk profile(s) (strategic asset allocation, benchmarks, management style (active/passive), etc.) - selection & monitoring of asset managers According to the Law, investment policy declaration shall be developed & approved by fund board. If it lacks professionals in the area of investments, the board must involve investment consultants into development of the declaration. • Asset managers’ responsibilities: - tactical asset allocation - security selection and other specific issues - selection of traders

  8. ASSET MANAGEMENT IN UKRAINE • There were a lot of “trusts” in Ukraine in the first half of the 1990-s, and significant number of them just robbed people • Professional asset management slowly began to develop after the Law on CII was passed in Mar-2001 • Majority of created investment funds are closed venture capital funds; 1st & only relatively actively marketed fund – Synergy (managed by KINTO) – was created in spring-2003 • Investment fund industry growth is hindered by undeveloped capital markets and still existing lack of people’s trust • 40 licensed asset management companies, 5 of which have already obtained license for pension fund asset management – rapidly growing interest to pension business

  9. UKRAINIAN PENSION FUNDS:WHERE TO INVEST? • Internal government bonds • External government bonds • Corporate bonds • Municipal bonds • Equities • Other domestic investments • Foreign investments

  10. INTERNAL GOVERNMENT BONDS • Marketable internal government debt amounts to ~ 4% of GDP and the most of this are short-term and/or poorly structured instruments • Secondary trading – almost absent, primary market – non-market, uncompetitive mechanisms, MinFin wants to introduce min legal limits for PFs, CII, insurers • Must be the most liquid, efficient, transparent financial market in almost any country • Ukrainian government declares (in some official policy documents) its importance but in practice do little to develop it, borrowing mainly on international bond market

  11. EXTERNAL GOVERNMENT BONDS • Jun, Sep 2003 – very successful issue of US$ 1 billion 10-year global bonds (7.65%), Feb-Mar 2004 - US$ 600 million 7-year global bonds (6.875%) • Market capitalization exceeds US$ 3.5 billion • The only relatively highly liquid securities market of Ukrainian issuers • Bid-ask price spread: ~ 20-50 bps • It’s unclear how much accessible this market will be for residents, incl. PFs – current regulations are incomplete and create some obstacles for such investments

  12. CORPORATE BONDS • Most dynamically developing debt market segment • Since 2001 grew from almost zero to ~ US$ 200 million • Main investors and players are Ukrainian banks • Several large and some medium-sized banks are actively developing their underwriting businesses • Secondary market – illiquid, primary market – insufficiently competitive • Market players hope for near coming of PFs, CII, etc. • Government is introducing national credit rating system

  13. MUNICIPAL BONDS • After famous default by City of Odessa in May-Jun 1998 and debt crisis of Aug-1998 the market was dead • Legal & regulatory framework was renewed during 2001-2003 • Jul-Aug 2003 – US$ 150 million 5-year fiduciary external bond issue by the City of Kiev (8.75%) • Nov-Dec 2003 – Kiev issues UAH 150 million (~ US$ 28 mil.) domestic bonds, but only UAH 100 million were placed • Market is developing: UAH 20 million internal bonds of the City of Donetsk are almost ready for issuance, several other transactions – in the pipeline

  14. EQUITIES • The market is recovering from the 1998 crisis: 50% growth in 2002, 65% - in 2003 (KP-Dragon index) • But market size and liquidity are still very low: relatively tradable “free float” is ~ US$ 2 billion (~ 4% of GDP) • Most analysts agree that Ukrainian companies are heavily undervalued, so the market cap has the potential to surge • Privatization – major potential driver of market growth and liquidity improvement • Coming PFs may also contribute to market development, but hardly it will be in the near future (PFs’ equity exposure probably will be no more than 5-10%)

  15. OTHER DOMESTIC INVESTMENTS • Real estate –Laws on state registration of property rights in real estate & on relevant State registry are still not passed; but returns are very attractive now (rent income ~ 20% and prices are rising) • Mortgage securities – Government pays very big attention to mortgage market development and the market is growing, but laws & regs needed to start up securitization process are still very incomplete • Bank deposits – most likely that during first years of NPFs’ operation 40% limit utilization will be very high, but it should fall gradually as domestic capital markets will develop; ideally – should be used only for liquidity management purposes • Bank metals – treated like foreign currencies; investments may be only in the form of current/deposit metal accounts with Ukrainian banks; gold price – excellent diversifier (optimal share ~ 6-9.5% - estimates of the World Gold Council)

  16. FOREIGN INVESTMENTS • Securities Commission must set minimum acceptable credit rating level of foreign countries’ external debt (PFs will be able to invest in bonds and shares of issuers from countries with such rating level or higher) • National Bank must develop and approve until Jul-2003 regulation on simplified procedure for investments of PFs & life insurers into foreign securities; but it seems that NBU is not going to do it • The most likely is that foreign securities will be difficult to access for PFs in the near future

  17. CONCLUDING REMARKS • Ukrainian pension fund industry is just incipient • Great interest among potential market players, but … significant risks exist that the process may be stalled (tax treatment, managers’ integrity, politics, etc.) • Keen need for development of domestic local-currency capital markets, and first of all – government bond market (don’t exaggerate crowding-out effect) • Need to eliminate limit on government securities or, at least, raise it from current 50% to 70-80% • NBU should create appropriate regulatory framework for investments in Ukrainian sovereign international bonds and for foreign investments

  18. ADDITIONAL INFORMATION Thank you for your attention! • www.pension.kiev.ua • varfolomyeyev@padco.kiev.ua

More Related