Challenges of running a pension fund in the Cypriot way
We are at the point where pension funds in Cyprus are trying to be move into a new era of more modern management under the European standards. It is a transition period from amateurism to more professional management of pension funds and that’s why the challenges of running such a pension fund are too many.
We are waiting for the implementation of the new European Pension Directive 41/2003. We hope that in the next six months it will bring a lot of changes and new challenges to the pension funds in Cyprus. Our view of the directive is very positive; without it we would need too long to get to a professional level.
The high interest rates which we have been enjoying until few years ago are history and with the adoption of the euro, scheduled for January 2008, interest rates are coming down with the result that returns of the funds portfolios are also coming down.
This has driven board committees of the pension funds to hire investment consultants to develop new strategies to achieve higher returns.
The Hotel Employees Provident Fund is an industry sector pension fund founded in 1968, of which the members are the employees who work in the hotel industry, as tourism is the largest industry in Cyprus. We have around 14,300 members with just over €230m of assets under management. The fund is the biggest pension fund in the private sector. Our three years rolling investment return is 5.1% which has been achieved with very little risk.
Until now 60% of the fund has been placed in cash deposits, 15% in bonds, 14% is represented by loans to our members, 4% in equities and 7% in real estate, all invested locally because of the higher interest rates mentioned previously. Things are going to change and we know that we have to implement our strategies and infrastructure to become a modern and internationally focused portfolio management organisation.
We are in the process of developing our new software program for our pension fund. Using the latest technology, it will give us the opportunity to analyse in more detail statistical information about our members which is a very useful decision making tool for the board committee. It will also make reporting to our members easy, faster and clearer. We are also going to develop our own portfolio management software, but it will be less sophisticated than those used by investment consultants.
One of the biggest challenges is definitely the new requirement for the education of trustees in matters such as investment strategy. They are conservative and I think they will remain so for a long long time. This is because our pension fund didn’t lose any money in the years 1999–2000 when the stock market in Cyprus collapsed from 830 points to 75 a few years later, so to be conservative at that time was good.
The stock market collapse brought to investors an experience of financial disaster which is not easy to overcome. In the last couple of years people started to move ahead again, but still there is a long way to go. Because of the stock market, corporate and fund governance is a hot issue in the Cypriot market especially following a number of incidents. All public companies adopt corporate governance policy but not the pension funds. Our fund is very transparent to our members, we publish all our proceedings even on the internet, and we inform our members of all the decisions which we take.
Currently, we are in the process of developing our strategic asset allocation, which is based on a study that we conducted with our investment consultants. We like to develop new ways of investing based on what we have experienced until now. We know that our members are not in any position to accept negative returns, even given the long term aim of the fund, and this is due to their personal experience of the stock market referred to earlier. So this transition has to be slow and very conservative in order to minimise the volatility of the total fund.
As a first step we planning to reduce cash deposits to 40% and increase the exposure to equities to 15%. We are keeping the 15% in bonds and the loans to members but we are increasing real estate to 15%. In the future we will further reduce the cash deposits and increase investments to both equities and bonds, in order to have a balanced portfolio. The development of a new investment strategy is our most important challenge.
Marinos Gialeli is general manager of the Hotel Employees Provident Fund in Cyprus