How has the past year affected OTP Pension Funds' performance?
After a negative, pessimistic year in 2008 we achieved real success last year. In terms of investments, 2009 was also the most successful year of the Funds. Last year for instance we achieved a yield of 33.51 percent in our growth portfolio, having the highest risk-exposure in our Private Pension Fund. I believe everybody would love to make as high a yield as that on their own savings. However I must note with respect to these figures that in 2008 our yield was nearly at the same level, however with a negative sign. Last year nearly all portfolios outweighed the loss of 2008.
Last year the entire fund segment saw an upswing. In April, capital markets started to move. Those who did not leave the given investment position but hoped for a long term winning strategy could achieve excellent yields.
In my opinion, in the near future, the drive for growth of the Private Pension Funds will be return on the investments and not deposits. The recent figures show that Funds have compensated the losses that they suffered due to the crisis more rapidly than was expected. The optional portfolio system which last year all Private Pension Funds had to introduce – in line with the expectations – generated significant market variance. Like the billiard balls that were hit, the market players have moved along with their investment strategies.
What accounts for OTP Pension Funds' success, particularly in the past year?
The fact that last year we also achieved significant yields in the funds segment is the result of our consequent investment policy.
On January 1, 2008 OTP Private Pension Fund was one of the first to introduce the optional portfolio system, which enables the fund members to invest the membership fees paid to the private pension funds at the expected yield according to the investment package, bearing risk according to their choice. Previously, the domestic private pension funds have managed the assets of all members based on a uniform investment strategy. However, international experience shows that asset management is more successful if the investments are adjusted by the funds to the path of life, yield expectations and risk-taking willingness of the members.
Therefore we have opted for an early launch in case of the Private Pension Fund and to similar reasons in case of the Voluntary Pension Fund. The fact that this coincided with the financial and capital market crisis was a misfortune. Obviously if we had changed the portfolio to higher exposure to shares we could have benefited. But the change-over did not happen overnight.
Last year we struggled to explain to all fund members not to worry. In the case of a 15-year-long portfolio a decline similar to the worst record of 2009 is indeed reckoned, which will however be balanced out in the long run as stocks will generate long-term, extra yields for our fund members. The fact that we have managed to overweight all previous losses in one year is more than we have expected.
What percentage of your pension funds' are actively managed?
The portfolios of OTP Funds are actively managed. We have assigned a benchmark to each of the portfolios, but the fund manager is applying an active strategy to achieve the best possible result that surpasses the benchmark.
What is the breakdown of your portfolios? Bonds? Commercial property? Equities?
In accordance with the regulations, members of the Hungarian Private Pension Funds can select from three, while members of OTP Voluntary Pension Fund from five investment packages.
Law limits the share ratio of the Private Pensions Fund's “Classic” portfolio to a maximum of 10 percent, which is in the case of the “Balanced” portfolio between 10-40 percent and the “Growth” portfolio created for young people of more than 40 percent. OTP Funds, including the Voluntary Fund however having a dynamic view, backed up with careful analysis, have created their portfolios having one of the highest exposure to shares.
Unfortunately a new government decree came into effect last June in order to encourage HUF investments, which is a step back for OTP Funds compared to the previous situation. We need to reduce FX-exposure of certain portfolios in the Private Pension Fund segment. Unfortunately this has reduced diversification options for the different portfolios as the present Hungarian stock market is rather narrow, and there are less investment opportunities.
The new decree limits on the percentage of foreign assets in private pension fund portfolios to 35 percent in the case of the portfolios bearing the highest risk, to 20 percent in the case of the balanced and to five percent in the case of classic portfolios, which can be basically foreign shares and government securities.
In terms of equities, do you follow a “growth” or “value” approach?
Our investment style is fundamental in character and has a bottom-up structure. The investment decisions are based on the detailed analysis of individual companies and their fundamental assessment. We buy only those shares whose rates are under the target value established by us and at the same time carry a low risk as compared to the yield they are able to realise. We sell all securities that are becoming overvalued as compared to our analysis. While modifications of the fundamental image do influence our decisions, smaller market fluctuations do not. The latter are considered by us as favourable purchase opportunities.
To what extent does the changing political and economic environment influence the day-to-day operation of OTP Private Pension Fund?
The recent period has been indeed lively in the Fund business. Several new regulations came into effect that have affected both the mandatory and the voluntary pension funds, and have changed the operation of the funds. The next period also seems to bring a lot of news, as the changes in the pension system will have great influence on the operation of the funds.
We face the issue of pension benefit as the current fund system is only suitable for collection of pension contributions. In order to make the first benefit payment in 2013 we have to set up the proper organisation structure for the funds.
Do your pension funds' follow a basic broad model?
Today, complementary pension savings in Hungary – including both the compulsory and the volunteer private savings sector – operate on the basis of defined contribution. Although there is legal opportunity to create pension funds operating on the basis of defined benefit, at present there are no such funds in Hungary. Just like the neighbouring countries of CEE, we have adopted the South American model. Although the system has been at work for 12 years now, it still needs further refinements and fine-tuning. One of these refinements involves the question of crossing between the portfolios. In Chile, for example, people may cross from a given portfolio to another not only at a given point of time, but in the course of a one or two year period. It makes it possible to ward off the unfavourable effects of hectic market movements.
Is your fund management internally or externally managed?
The portfolios are managed by OTP Alapkezelo Zrt. (OTP Fund Management), which is the largest domestic fund and assets management company. OTP Alapkezelö is the market leader in both securities fund management and institutional fund management.
How do you measure an asset fund performance? Is it based on any particular benchmark or bourse indices?
The performances of the portfolios are compared to a benchmark. A reference index reflecting the investment policy is assigned to each portfolio and the performance of each portfolio is measured against this index. The goal is, of course, to surpass the benchmark performance in the long run, with reasonable risk assumption.
How does the Hungarian banking background influence performance?
The difference in the funds with or without banking background is reflected not so much in performance. Stable and safe background is an advantage in case of a fund having banking background, which is especially true for us, as we are supported by OTP Bank, the largest retail bank in Hungary.
Furthermore, the difference can get more importance in the future with respect to benefit payment as significant guarantee capital is a precondition for benefit payment even pursuant to the previous draft legislation.
What changes in the banking market is also undergoing simultaneous change that might be similar to your own journey?
Today all career starters are obliged to join a mandatory private pension fund. But similar to banking products, the demand for voluntary savings is also declining. Today the largest challenge in the financial sector is to regain trust.
How many people in Hungary have private pensions now?
In Hungary the private pension fund system was established in 1997, so we have achieved significant growth in the last 12 years in terms of the number of members. And as career starters are obliged to join a mandatory private pension fund, the number of members grow year by year. The total number of the private pension funds members is more than three million. Unfortunately in Hungary most of the people do not think of how they will be able to provide funds for maintaining their current living standards, therefore the market of voluntary funds is below 1.5 million members.
What about home-grown oversight and supervision?
Hungarian supervision is an integrated financial supervision that controls the activities of not only banks, but also of insurance companies and of the players of equity markets on a permanent basis. We have managed to establish a stable professional relationship between the supervision and the players of the pension insurance market. Luckily, numerous leaders and colleagues of the supervision are participating in supervisory and control projects of the EU (CEIOPS, OPC), through which they might also contribute to the improvement of the Hungarian market.
What about tax incentives for ordinary Hungarians to contribute more into private pensions – are there any?
The prevailing government has realised the importance of self-provision and supports it under specific conditions: the mandatory pension fund membership fee can be supplemented up to a certain extent and 30 percent of the individual voluntary pension fund contributions (up to a limit) can be reclaimed.
On the other hand optimisation of state funds can also generate decisions, like the one that has become effective this year: employers' voluntary pension fund contribution bears a 25 percent tax burden, while this rate was 0 percent last year. As a result voluntary pension fund contributions have decreased, however to a lower rate than we have expected.
How could economic integration into the EU affect the future performance of OTP Pension Funds?
Today it is rather natural that we are a member of the European Community, with all its benefits and disadvantages. Opportunities have opened up, both with respect to investment instruments and professional knowledge. In the course of our investment activities we have been able to establish close business relationships with international fund managers, who might have a beneficial influence on our yields in the long run. Naturally, in the course of integration we must not forget that a bigger market generates greater competition as well, and as a result we need to serve our domestic clients at an ever increasing level.
What are your reflections on the functioning, role and future of Hungarian funds?
I find it essential that state and private pension fund services may not be treated and handled separately. Either element of the system is changed, it will influence the other. The pension system needs to be sustainable and balanced in the long run.
Therefore as the chairman of the Stability Funds Association (Hungarian Association of Pension and Health Funds) representing the Hungarian private pension fund segment and as the chair of EFRP's (European Federation for Retirement Provision) forum on private pensions in Central and Eastern European countries based on international experiences I work to develop and improve our current system.
Csaba Nagy is MD at OTP Mandatory Private Pension Fund