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Pensions in Central & Eastern Europe: In search of size and scale

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Citadele Open Pension Fund

The JSC Citadele Open Pension Fund (COPF) now has a 17% market share in Latvia but assets under management are tiny by international comparison, at around €35m. COPF is a third-pillar pension fund – with the state compulsory unfunded pension scheme as the first pillar and a state-funded pension scheme as the second.

It can function both as a workplace scheme, as a voluntary fund for individuals and it now has a membership of 54,053, or just under a quarter of the market. Half of these members participate in the fund as individuals and the other half belong to company schemes.

Jolanta Jērāne, chief executive of both Citadele Life and the open pension fund, says the strength of Citadele Asset Management is its combination of core expertise in Eastern European markets with third-party products for other regions and asset classes, which are carefully selected and monitored.

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One of the main challenges the open pension fund has faced was the currency change in January 2014, when Latvia joined the euro-zone.

“This was a huge project, ensuring that the introduction of the new official currency did not affect our customers, by making sure IT systems were working properly and all documents were prepared, and so on,” says Jērāne.

The pension fund has dealt with another large operation, namely the transfer by GE Money Bank Latvia of its third-pillar pension funds to the JSC Citadele Open Pension Fund.

GE Money Bank had signed a deal with the Citadele group to transfer several of its product portfolios to Citadele group companies as part of its strategy to exit the Latvian market prudently and responsibly, Jērāne explains.

Right now, the open pension fund is in the process of merging some of its plans in order to increase efficiency, she says. Despite being a large player in the Latvian pensions markets, the fund has a team of just 12 individuals.

By country, the fund has the largest weighting of assets in the EU – excluding Latvia and Lithuania – with 53% of assets in this region. Some 36% of assets are in Latvian securities and 3% in Lithuanian investments.

In terms of assets, 44% is allocated to investment funds, 21% to government securities, 20% to corporate bonds. The remainder is in deposits, shares and cash. Some 88% of assets are now denominated in euros; 11% in US dollars.

The fund is part of the Citadele group — a financial services group subsidiary of Citadele Bank, whose core market is the Baltic states.

Citadele Bank operates as the pension fund’s custodian, and another part of the group — IPAS Citadele Asset Management — manages investments.

Citadele Bank originally grew out of the Parex Banka, having been created in 2010 by the Latvian Privatisation Agency to take over a large part of Parex Banka’s assets after the latter became insolvent during the financial crisis of 2008.

Swedbank Open Pension Fund

When Swedbank launched its Latvian third-pillar, open pension fund back in 2002 it initially included three pension plans as options for savers – Stabilitāte+25, Dinamika+60 and Dinamika+USD. Then in 2006, it added a fourth equity-only pension plan – Dinamika+100.

The open pension fund now has total assets of €63.4m and a membership of over 75,000; as a third-pillar pension fund, participation in Swedbank Atklātais Pensiju Fonds is voluntary. The strategy of Dinamika+100’s is to invest 100% of assets in equities and equity-like investments while maintaining global diversification.

The plan has a strategic focus on long-term investments. It aims to have almost 100% of assets invested in equities, although the minimum permitted exposure is 75%.

The plan invests in equities even during downturns in the belief that this approach will pay off in the long term. This aspect of the strategy needs to be properly communicated to clients: “Our society’s level of information about the pension system and pension savings, and the need to make long-term savings, is quite low,” says Māris Sīlītis, chief executive of the Swedbank Open Pension Fund (SOPF).

The Dinamika+100 portfolio has two layers, with a low level of correlation with each other, as well as different risk drivers. A layer of liquid assets, in developed and emerging markets, is primarily a low-cost beta portfolio investing through exchange-traded funds (ETFs) and funds.

A layer of less liquid local and regional assets — mostly listed stocks – is a pot of direct investments managed actively in-house, and the main source of alpha opportunities.

As much as 30% of assets are invested in US stocks, 43% in European developed markets and 14% in emerging Europe. A further 10.5% is in Japanese stocks, and the remainder in Latin American and Asia ex-Japan equities.

Dinamika+60 has 46% in fixed income and 54% in equities. In fixed income, there is a 32.5% allocation to Baltic securities.

In equities, the split between US and developed European equities is roughly equal, with 18% in the former and 17% in the latter. Some 7.7% of assets are held in emerging Europe equities, with the remainder in Latin American, Asian equities and Japan equities.

The Stabilitate+25 portfolio has around 78% in fixed income, most is in Baltic instruments. Of the 22% equity allocation, a little under half is US-based.

SOPF also has a fourth pension plan – Dinamika+USD. The portfolio has the same split between fixed income and equities at the Dinamika+60, but contains US, rather than European fixed income, has a heavier weighting towards Asian stocks, and is lighter in European developing market equities than the Dinanmika+60. It has €2.5m in assets.

SOPF is investing in communication to the public about pensions. Its educational portal – ‘Serious Pension’ (www.nopietnapensija.lv) – contains information, research, videos and calculators.

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