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Latvian pension funds produce positive returns despite market turmoil

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Latvia’s second and third-pillar pension funds generated positive returns in 2015 despite a volatile second and third quarter.

The results were critical for the seven second-pillar fund managers.

Under a new performance fee regime introduced in 2015 managers were rewarded for achieving positive results and penalised for negative ones.

In the case of the second-pillar funds, the 12-month average return declined to 1.93%, from 5.24% a year earlier, according to the Association of Commercial Banks of Latvia (LKA).

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The return of the eight active, equity-orientated funds fell from 5.52% to 2.29%, that of the four balanced funds from 5.28% to 1.43%, and that of the eight conservative bond plans from 4.57% to 1.26%.

Since the end of 2014, membership of the mandatory system has grown by 4,800 to 1.25m and assets by 16.3% to €2.3bn.

Assets increased partly because the contribution rate rose from 4% to 5% in May 2015.

In terms of asset allocation, all classes of funds adopted more conservative strategies, especially in the fourth quarter.

The overall share of pension fund investments in equity and equity investments fell by 6 percentage points year on year to 26%, and that of bond and bond funds by 4 percentage points to 50%, while the cash share grew by 7 percentage points to 15%.

Geographically, the share of investments in Latvia increased from 42% to 43.5%.

There was a growing interest in alternatives such as funds investing in Latvian venture capital and real estate.

The second-pillar funds were also one of the biggest investors in the green bonds issued in 2015 by Latvenergo, the state-owned electricity and thermal-power supply, generation and transmission company.

The bonds were the CEE’s first renewable energy securities issued by a state-owed company.

The funds increased their share of investments in Eastern Europe from 17% to 20%, and that in the rest of Europe from 14% to 16%, while scaling back their asset allocation in North America, Asia and in international/global securities.

Third-pillar average 12-month returns also declined over the year, from 5.33% to 2.28%.

Those of the active plans fell from 6.62% to 3.34%, and those of the balanced plans from 4.91% to 1.71%.

There was relatively little change in the balanced funds’ asset allocation.

As of the end of 2015, bond and bond funds accounted for the highest share of portfolios (64%), followed by cash (14%) and equity and equity funds (10%).

The active funds reduced their equity holdings from 41% to 34% while increasing their bond and cash allocations to 43% and 11%, respectively.

Latvian-denominated securities accounted for 34% of third-pillar fund investments, Eastern Europe 11%, the rest of Europe 23% and global securities 16%.

Assets grew over the year by 17.7% to €330m, and membership by 8.1% to 255,012, of which 22% had their contributions paid by their employers.

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