SLOVAKIA - The six funds in the Slovak mandatory second pillar posted negative returns for the second quarter of this year, halving the six-months’ performance just as a new bill introduced structural changes.
For the first half of 2009, the DSS funds reported a slightly positive return of 0.25% after a positive result for the first quarter of 0.5%, according to figures compiled by the Slovak pension fund association ADSS. (See earlier IPE story: Slovak funds grow 0.5%)
While pension funds in other countries profited from an upturn in the markets in the second quarter, the Slovak funds had to face “dramatic changes”, explained Viktor Kouřil, general manager of ING’s Slovak pension fund company.
Management fees were slashed on 1 July from 0.065% to 0.025% plus a performance-based fee depending on the size of the positive return over a six-month period.
The law also required all pension fund companies to guarantee there will be a positive return over that period.
If the return is negative, the pension fund company has to pay the difference from its own assets.
A new benchmark was also introduced “without transition period”, which meant that funds had to restructured their portfolios in the second quarter, noted Kouřil.
“In more detail, we were selling state and corporate bonds (including financial institutions) with longer maturities.”
These sales led to losses in the portfolios for one fund because the National Bank of Slovakia (NBS) changed the pricing of corporate bonds from 100% to 50-70%.
Furthermore, the pension funds were selling off longer-duration Slovak state bonds in a market which was relatively illiquid, depressing pricing even further amid the massive sell-off.
“To conclude, the H1 2009 performance of DSS funds must be viewed in terms of dramatic changes in the investment strategies and therefore cannot be compared to other countries,” said the ADSS.
And at least for the near future, until the 2010 election passes, the market expects prime minister Robert Fico to cut the contribution rate for the second pillar “significantly”, accoeding to Jiri Rusnok, director of pensions at ING.