Last July, Estonia’s Ministry of Finance published a draft Investment Funds Act aimed at liberalising pension fund investments in unlisted securities and real estate. Under the new rules, pension funds would be allowed to acquire controlling stakes in companies, in a bid to increase their participation in the domestic economy. “The local market is too small for pension funds, both in terms of availability of assets and liquidity,” notes Martin Rajasalu, board member of pension provider Nordea Pensions Estonia. That is why, he adds, Estonian pension funds have benefited from the unrestricted access to foreign markets – the OECD’s 2013 Pension Markets in Focus report showed that they were among the most diversified. The total assets of second pillar funds were €2.2bn as of December 2014, having grown more than 40% in two years. Rajasalu says the key issue is getting small employers to engage with the second pillar system to ensure that lower paid, less well educated groups build a pension income. However, there are currently no proposals to provide employers with incentives to offer new pension schemes. 


The Hungarian government is on track with its plan to dismantle the second pillar system on the basis that it is not generating adequate income. As of January 2015, the remaining four funds still operating face closure unless they can demonstrate that 70% of members have been paying fees regularly for at least two months over a six months period. If they are unable to, the state will transfer HUF200bn (€651m) of assets onto its balance sheet. Since 2010, when the prime minister, Viktor Orbán, took office for the second time with a parliamentary supermajority, around €12bn of assets have been transferred to the state. Membership has shrunk from 3m to the current 61,500. The remaining second pillar assets being held by pension funds are valued at HUF205.4bn. 


Last year, the Kosovo Pension Savings Trust (KPST), the sole institution providing DC pensions to the country’s employees, made changes to its investment strategy. KPST moved from a traditional 40/60 equity/bond allocation towards a model designed to increase diversification, reduce risk and provide stable returns. In order to do so, the fund rewrote its investment principles, guidelines and processes. Once implementation was complete, the fund invested €200m according to the new risk/return framework, adding five new asset managers and seven new investment vehicles, mainly consisting of multi-asset instruments and absolute return funds. KPST manages €1.05bn of assets on behalf of more than 472,000 members. The fund returned 8.48% in 2013 and 6.53% year-to-date as of November 2014.


Beginning this January, Latvian pension funds active in the second pillar are subject to a new fee system, which introduces a performance fee for managers. Managers will be eligible to receive the performance fee, adding on a fixed fee component, only if the investment results are positive in absolute terms. The performance fee will be capped, depending on the type of plan. “The demand for positive returns in absolute terms stems from prior experience when, back in 2008-2010, the pension plans suffered considerable losses due to market returns,” says Pēteris Stepiņš, funds manager at Swedbank Investment Management. This was badly received by the regulator and the general public.This is why the current system is focused on positive returns. Recent regulatory changes opened up pension fund portfolios to an extent, with less restrictive limits for fund ownership (both open-ended and alternative funds) and increased overall portfolio limits for venture capital and private equity investments. Second pillar pension fund returns for the first three quarters of 2014 were 4.21%. Funds manage €1.9bn for 1.2m members.


Lithuania enters the euro-zone as of January 2015, being the last Baltic country to adopt the euro. This is expected to have a positive impact on the returns of Lithuanian pension funds and mutual funds, since two-thirds of their assets are euro-denominated. The adoption of the euro will reduce conversion and transaction costs. During the first nine months of 2014, the assets under management of Lithuanian second pillar funds grew by 14.3% to LTL6.2bn (€1.8bn), while third pillar funds’ assets grew by 13.9% to LTL148m (€43m). The increase in contributions accounted for the majority of the growth in assets for second pillar funds. Returns averaged 6.04% for second pillar funds, 2.5 times higher than previously. Third pillar funds returned 5.8% on average over the same period. Changes introduced last year include additional contributions from employees and state subsidies, while from 2020 the standard contribution rate will rise to 3.5% of salary. 


From this January, pension funds face a minor revolution with the introduction of legislation on second pillar pension payouts. Until now, pension funds have only administered contributions but with the new rules they will have to provide annuity products. Alena Fábryová, pension manager of Slovakian pension provider ING SK, calls this “a significant milestone”. She says pension funds are working on the implementation of changes in the third pillar regime that came into force at the beginning of 2014. These changes included new tax advantages, a new benefit system and a reduction in management fees. But there is now a need for stability in the legislative framework – second pillar legislation has changed more than 25 times during its first decade, according to Fábryová. As of last December, second pillar assets were €6.3bn and third pillar assets were €1.4bn.