18 september 2009, sofia, bulgaria
DESCRIPTION
INTRODUCTION, RESULTS AND EXPERIENCES OF THE MULTIPORTFOLIO SYSTEM IN THE HUNGARIAN MANDATORY PENSION FUNDS. Csaba Nagy chairman Hungarian Association of Pension Funds. 18 September 2009, Sofia, Bulgaria. Contents. Background Drawbacks in competition - Pillar 1 vs Pillar 2 - PowerPoint PPT PresentationTRANSCRIPT
ww
w.s
tab
ilit
as.e
u
1
INTRODUCTION, RESULTS AND INTRODUCTION, RESULTS AND EXPERIENCES OF THE EXPERIENCES OF THE
MULTIPORTFOLIO SYSTEM IN THE MULTIPORTFOLIO SYSTEM IN THE HUNGARIAN MANDATORY PENSION HUNGARIAN MANDATORY PENSION
FUNDSFUNDS
18 September 2009, Sofia, Bulgaria
Csaba NagyCsaba NagychairmanchairmanHungarian Association of Hungarian Association of Pension FundsPension Funds
Association of Pension and Health Funds
Contents
Background Drawbacks in competition - Pillar 1 vs Pillar 2 Pressure to improve - Legislative changes in 2008 Implementation of multifunds Accounting unit based approach Post implementation experiences Evaluation of the Hungarian multifund system An alternative approach - „Target date (lifetime) funds” system Conclusions
2
Association of Pension and Health Funds
Background Introduction of funded Pillar 2 in 1998
• Rapid growth of mandatory pension funds• Participation mandatory for first-time workers• Entry was open for active workers upon voluntary decision before 01.09.1999• Option to return upon retirement to social security pension scheme until 2002• Management of assets in a single fund
3
Membership, thousand persons
2955 2983
1339
2280
2021
22512192 2304
2403 2511
2788
2655
0
500
1000
1500
2000
2500
3000
3500
Nu
mb
er
of
me
mb
ers
0,0%5,0%10,0%15,0%20,0%25,0%30,0%35,0%40,0%45,0%50,0%55,0%60,0%65,0%70,0%75,0%80,0%
ac
tiv
e p
op
ula
tio
n c
ov
ere
d
Number of members in percent of active population
Assets in million Euros
69826019
6305
7813
4830
3562
2153
17531154
353664
115
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009 Q
1
Ass
ets
in m
illio
n E
urs
0,0%
2,0%
4,0%
6,0%
8,0%
10,0%
GD
P %
assets in million euros in percent of GDP
Association of Pension and Health Funds
Drawbacks in competition Pillar 1 vs Pillar 2
• Guaranteed growth of state social security pensions based on „Swiss indexation” (i.e. the average of the consumer price index and the wage index);
• Promises by politicians: pensions for 13 or even 14 months in a year• Unattractive real returns of mandatory pension funds
Real return on overall portfolio of mandatory pension funds (%)
-4,0%
-2,0%
0,0%
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
2001 2002 2003 2004 2005 2006 2007
– Average real return in period from 2000 to 2007: 1.7 %
Loss of trust in the multi-pillar system
4
Association of Pension and Health Funds
Reasons for underperforming returns
The proportion of the government securities within pension fund’s investments in 2000-2006: ~ 70%
• Relative high government bond’s yields• Frightening effects of the stock exchange crisis 1998• Short-term approach (a „wrong year” involves competition drawback at member
recruiting)• Publishing of only 1 year’s yield
5
There is no possibility to take yield advantage of higher risk assets
Yields of Hungarian government bonds and shares (1997-2007)
0,0
1,0
2,0
3,0
4,0
5,0
6,0
7,0
8,0
BUX; index ofblue-chipsshares listed onBudapest SEMAX; index ofHungarianGovernmentBonds
Association of Pension and Health Funds
Pressure to improve - Legislative changes in 2008
• Introduction of the multiportfolio’s system (from 1 January 2008 it’s an opportunity, from 1 January 2009 it’s compulsory)
• Introduction of the accounting unit based records system (from 1 January 2008 it’s an opportunity, from 1 January 2009 it’s compulsory)
• Restriction of the asset management fee: The annual fee not allowed to exceed the 0.8% of the size of assets.
• Restriction of the operating expenses: Maximum 5.5% (from 2009: 4.5%) of the membership fee incomes can be spent on operating expenses.
• Apart from 1 year’s yield indexes the last 5 years’ (from 2009: 10 years’) indexes must be published.
6
Association of Pension and Health Funds
Implementation of multifunds – administrative requirements
• Funds must create exactly 3 portfolios• Classic (law risk and yield)• Balanced (middle risk and yield)• Growth (high risk and yield)
• A member’s saving can only be in one portfolio at the same time• Member’s decision can be
• an own choice• or „auto-enrolment” which means the acceptance of enrolment based on the time
remaining until retirement age (62 years)• If it’s more than 15 years: Growth portfolio• Between 5-15 years: Balanced portfolio• Less than 5 years: Classic portfolio
• Funds must update the automatic enrolment based on time remaining at the end of every year
• Members can change portfolio any time, but not more than with 6 months’ frequency (fee: 1 ‰, max 2,000 HUF)
7
Association of Pension and Health Funds
Implementation of multifunds – asset management requirements
8
Classic Balanced GrowthReal estates 0% MAX 10 % MAX 20%Venture capital funds
0% MAX 3 % MAX 5 %
Derivative funds 0% 0% MAX 5 %Shares MAX 10 % MIN 10 %
MAX 40 %MIN 40 %
The limits ensured necessary scope to create well-diversified portfolios.
Determined optimal investment term• Classic portfolio: short-term liquidity without losses, yield advantage
will have to appear within 5 years• Balanced portfolio: yield advantage will have to appear within 10
years• Growth portfolio: yield advantage will have to appear long term (over
10 years)
Association of Pension and Health Funds
Accounting unit based approach
• Earlier: Distribution of yields by average stocks of individual accounts every quarter
• Accounting unit based records system• Account keeping in units primarily• Base exchange rate at the time of starting: 1.000000 HUF/unit• Daily calculation and publishing of exchange rates for all portfolios• Every transaction is converted from HUF to units (and in the opposite direction) by daily
exchange rates• Account balance in HUF: account balance in unit x daily unit exchange rate
• The new method is exact, but labour-intensive: it requires close cooperation of fund, asset management company and custodian every day
• The real challenge - system development and operation - was the change to accounting unit based method (less the multiportfolio system)
9
Association of Pension and Health Funds
Implementation statistics
10
Headcount (person)
Distribution
Classic 208 0,03%
Balanced 53 424 7%
Growth 671 097 93%
Together 724 729 100%
Headcount (person)
Distribution
Classic 3 162 4%
Balanced 17 045 22%
Growth 57 879 74%
Together 78 086 100%
Headcount (person)
Distribution
Classic 52 0,1%
Balanced 8 093 10%
Growth 69 941 90%
Together 78 086 100%
Members who didn't choose portfolio (by
age)
Members who chose portfolio (by
own decision)
Members who chose portfolio (by
age)
• 10 from 18 mandatory pension funds started in 2008
• OTP Mandatory Pension Fund’s data(market share by membership: 30%)
• Almost 10% of membership chose individually
• Most of individual decisions reflected the proper classification by age
• Slight overweighting of Classic portfolio
Association of Pension and Health Funds
Adverse returns geared by multifunds
2008: Unfortunate timing of implementationDue to recession and equity market trends in 2008, pension funds applying multifund system have significantly underperformed the funds with single portfolios.
11
2008 2009 H1
MAX 2,59% 2,39%
BUX -53,34% 25,15%
CETOP20 (in HUF) -50,22% 5,23%
MSCI Europe -42,39% 5,78%
MSCI World -35,70% 9,38%
MSCI Emerging Markets -49,25% 39,89%
Standard exchange rate index yields
• Significant part of 2008 year’s losses (not realized) till the middle of 2009.
• Difficulties in communication: In the annual statement of account (which was delivered in June 2009) members were facing the losses of 2008
Association of Pension and Health Funds
Post implementation experiences I.
Fund members’ reactions to the crisis in regard to OTP Mandatory Fund
12
• October 2008: falling of the stock market rates
• February 2009: publishing of the 2008’s yields of pension funds
• End of June 2009: Delivering of the annual statement for members
• 1,554 switching transactions during 20 months (number of members: 800 thousand)
• Members don’t show too much interest in their own pension savings.
Members' switchings between portfolios (Jan 2008 - Aug 2009)
050
100150200250300350400
Association of Pension and Health Funds
Post implementation experiences II.
Recommendations (not too much success) to members regarding the portfolio transfers:
• In case of lack of personal knowledge age based classification
• Choose portfolio for long-term• Don’t realize losses by switching to a
less risky portfolio
13
Fund members’ reactions to the crisis in regard to OTP Mandatory Fund
Classic Balanced 6
Classic Growth 11
Balanced Classic 131
Balanced Growth 48
Growth Classic 836
Growth Balanced 522
1554Total
Distribution of members' switchings by portfolio types
Association of Pension and Health Funds
Post implementation experiences III.
• Agents capitalize the crisis and „convince” the members of usefulness of switching.
• From the 2nd half of 2009 the rules of switching are more rigorous:• Members must declare they had been informed about fund’s yields and risks of switching• Raising of switching fee
14
Fund members’ reactions to the crisis in regard to switching between funds (all mandatory sector)
Switching between funds (person)
010 00020 00030 00040 00050 00060 00070 00080 00090 000
100 000
2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2(forecast)
Association of Pension and Health Funds
Evaluation of the Hungarian multifund system I.
Positives• Stable and useable model was born in a short time which can and must
develop further.• Possibility to create well-diversified investment portfolios.• In this time - in spite of crisis - retiring members are fortunate with the
new system (proportion of the government securities in „Classic” portfolio more than 90% - in single portfolio system it was only 70%)
Negatives• Funds introduce the multiportfolio system at different times:
• Due to crisis those funds which were faster and more client orientated suffered higher losses in 2008.
• Starting dates of daily exhange rates are different at the funds exchange rates of funds are not comparative directly.
15
Association of Pension and Health Funds
Evaluation of the Hungarian multifund system II.
Need improvement• Duration of portfolios are not optimal for all age-groups
• Duration of the 3 portfolios is not designed to match short-term savings (especially within 2 years before retirement) or the needs of career-starters (over up to 45 years)
• Switching portfolios may lead to losses• The law requires to allocate participants to the matching portfolio as of the end
of the year, regardless of the costs and losses caused by this forced switching.
• Participants are not encouraged to take advantage of diversification• Many of the participants are likely to stick to the portfolio they are allocated to.• Limited opportunities for the individual to allow optimal asset-liability matching.
16
Association of Pension and Health Funds
Multifunds system – an alternative approach I.
„Target date (lifetime) funds” system Intention: To avoid the double traps of taking low risk at young age and high
risk at old age• Creating the portfolios and classifying the members on the basis of age,
also.• But: If the member dosn’t choose individually, will stay in the same
portfolio until retirement.• Portfolios have life-cycle periods and maturity.• Number of portfolios is fixed. If a portfolio runs out, another takes the
place of it, and the new portfolio will be the longest maturity.• In the portfolios - in their duration - proportion of high risk assets
continuously decreases.
17
Association of Pension and Health Funds
„Target date (lifetime) funds” system
Alternative assets
Shares
Government securities
Money Market
Time turn of the asset allocation from working age (around 25 years) to retirement (65 years)
18
Association of Pension and Health Funds
„Target date (lifetime) funds” system - An example from USA
19
Association of Pension and Health Funds
Multifunds system - Conclusions
Key issues• Timing• Education of membership: Financial awareness ( Risk ↔ Yield)• Number of portfolios: Should be optimal for all age-groups• Investment policy: Enough room for diversification
20
ww
w.s
tab
ilit
as.e
u
21
THANK YOU FOR YOUR ATTENTIONTHANK YOU FOR YOUR ATTENTION
www.stabilitas.hu, www.stabilitas.eu