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Special Report

ESG: The metrics jigsaw

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Armenia: Caucasian pension circles

Armenia is implementing compulsory private pensions to help stimulate capital markets 

Key points

• Funded pensions will become mandatory from July
• The government plans a major boost in financial services
• Life insurance to be introduced in 2020

Armenia’s young, funded pension system will become mandatory from July, but it is only the first step in the government’s plan to get people to invest for their retirement.

Looking at the return statistics for Armenian pension funds recalls the time before the financial crisis. For 2016 the two providers offering funds with different risk profiles generated 9% on average between them. Fund performance for the first 10 months of 2017 is even higher at 13.3%, according to statistics provided by the Armenian Central Bank. 

The two fund providers operating since 2013 are Amundi-ACBA Asset Management and C-Quadrat Ampega Asset Management Armenia. C-Quadrat Ampega offers three mandatory pension products with different risk profiles. However, Arman Vardanyan, who runs the Armenian operation of the Austrian asset manager C-Quadrat, confirms that about 98% of pension contributions are concentrated in the conservative fund. The company has total assets under management of about AMD44bn (€80m) in the three pension funds. 

Since 2013, the fixed-income fund has returned 11% annualised while the conservative and the balanced funds each returned 9%.

Overall, AMD100bn is invested in the mandatory system in domestic bank deposits (32.8%) and Armenian government bonds (30%), according to the Central Bank. The share of assets in foreign investment funds was 28%. Corporate bonds, mortgage bonds and those issued by international organisations made up another 8.3% of investments. Total pension assets amount to 1.9% of the GDP.

Vardanyan says the funds are further diversified across government and corporate bonds, fixed-term deposits, ETFs and funds, as well as in currencies and sectors such as financials, IT, healthcare and industrials.

Just under 180,000 Armenians were contributing to a funded pension system as of October 2017. Of these, 66,000 were public employees, the rest being private-sector workers. This is noteworthy as the latter group had the option to leave the system in 2015, when the government’s proposal for a mandatory funded pension system for all citizens born after 1974 was challenged by the constitutional court. 

The government wanted to make the pension system mandatory for employed citizens only and intended to introduce major penalties for delayed payment of contributions. Subsequently, the pension system was made mandatory for public employees only. A few minor changes still have to be made, but the full mandatory element will still come into effect in July. 

The parameters remain the same as under the initial plan for a mandatory pension system – the monthly contribution is 5% of salary but no more than AMD25,000, or €44 (the average monthly income is about 140,000 drams). Additionally, the state will match some of the contributions. The annual costs to the budget for this measure are estimated at AMD14bn.

From next year, all those born after 1974 will have to make contributions to one of the funded pension plans – regardless of their state of employment. The system is not based on the idea of occupational pensions and is more a state-subsidised, individual defined-contribution savings account. 

All those making payments to a funded pension plan will receive a minimum state pension upon retirement plus a pension from their accrued assets in the pension fund. Older citizens will still be provided for under the pay-as-you-go state pension system.

The funded pension plans are sold by banks. Information on the new system can be obtained from banks and asset management companies.

Financial education in Armenia

In July 2017, the International Monetary Fund (IMF) noted in an assessment of the Armenian financial market: “In order to promote long-term savings, the government remains committed to the full implementation of the pension reform by July 2018, as well as the adoption of a donor-supported strategy to speed up the development of capital markets.”

One measure taken to achieve this was the establishment of an Armenia Investors Club to help with financial and capital-market development. It is financed “with help from the Armenian diaspora”, the IMF noted. About 8m Armenians are living abroad.

The government has also secured funding for a Pension System Awareness Centre to help with the transition to a mandatory funded pension system and other personal retirement products. Part of the challenge to the original government plan for a funded pension system in 2014 had also been because of major mistrust among some people towards capital markets. Additionally, they were worried their disposable income would diminish too greatly by having to contribute to a pension plan. 

The introduction of a mandatory pension system is part of a major new programme by the Armenian government together with the Central Bank to increase the availability of financial instruments by 2022. 

By the end of 2018 a capital development strategy is planned to help increase issuance of shares and bonds by local companies. By the end of the 2019 the government wants to see new financial services on the market, including insurance-based products. In 2020, a life-insurance market is to be set up to introduce new personal savings products for retirement provision and other long-term saving purposes.

Armenia hopes to build a new source for economic development by growing a financial services market, thus increasing investments in the own economy. 

To ensure regulation is up to par, a working group has been established to co-ordinate between the Central Bank and the Labour and Finance Ministries, as well as the state revenue committee. 

Arman Vardanyan, head of C-Quadrat in Armenia, confirms that asset management companies are helping the government by “supporting the implementation of a pension reform and the development of asset management and investment services, as well as capital markets”.

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