The Advent of a Pension Hryvnia
Steep standards in place for those wishing to enter the pension market
The new year will bring new players into the nation’s economic arena: twenty-six private pension funds, which are viewed by experts as a reliable domestic source of funding for the economy.
But it may not be advisable to hope that the Ukrainian market of domestic investments will develop instantaneously with the help of private pension funds. Even though these funds are registered, while twenty more companies are seeking to obtain fund administration licenses, fifty companies are getting ready to manage fund assets, and as many banks are ready to accept their money on deposit, Ukrainian experts are not ruling out a Russian scenario, where the market of private pension funds has been emerging for the past twelve years. “The prospects of huge profitability in the dim and distant future will both attract and discourage many fund administrators. Only players with significant statutory capital will be able to endure the period of establishment without losses,” Ukrsotsbank CEO Borys Tymonkin said in his forecast for the pension fund market, speaking at the November 16 news conference, “Private Pension Fund Market Development Forecast for 2005-2009.”
As he put it, during this period it will be crucial to prevent any scandals, disruptions, or financial losses. It turns out that the standards for new market players are very high. Optimists without considerable statutory capital will deplete their capital, “sitting in a puddle of losses,” or will attempt to set the highest possible commission rates. Otherwise, they will not survive. Yet, according to Mr. Tymonkin, earning a profit during the first two to three years is out of the question altogether. Funds and their administrators will work to build their name according to a transparent and clear scheme of distribution of pension fund assets: 40% deposited with banks, 40% converted into securities, and 20% invested in real estate. Whether this strategy will reverse public distrust that still lingers from the days of financial pyramid schemes is anyone’s guess.
In any case, today most experts agree that such a distribution of assets is both reliable and profitable. According to Ukrsots-Capital general director Serhiy Savchuk, bank deposits will remain the most attractive type of investment as long as interest rates are high, followed by government bonds, which carry lower interest. Yet Mr. Savchuk is certain: “If the government issues bonds with sufficiently high interest rates, especially for pension funds, this will be a win-win scenario for everybody.” As for corporate bonds, for which there is already a viable market, and stocks of Ukrainian companies, whose market is poised for strong growth, fueled by pension funds, experts voice unreserved optimism, which is constrained only by the absence of a new law on joint-stock companies. No one questions the bright prospects of investments in mortgage securities, which have yet to be introduced.
Mr. Savchuk eagerly shared the secrets of the practice of creating assets, which is based on cooperation with corporate clients. It turns out that it makes sense for employers to channel money into private pension funds because of a tax concession that makes it possible to accumulate pension savings by adding them to total costs, and subsequently to invest part of these pension savings in long-term business projects. No one is disregarding future pensioners either. Attracting them will take a significant amount of money and time. Still, if a person opts for this program instead of a life insurance policy, he is not likely to reverse his decision in the future.
Mr. Savchuk believes that life insurance companies and private pension funds offer products that differ in principle. Insurers promise a fixed insurance amount to everyone who makes regular installments. In the case of pension funds, it is up to clients to determine the procedure of accumulating pension savings. However, private pension funds will be able to compete with insurance companies only after they have created their assets. This means that the former have a head start of two to three, or even five years, over the latter. According to preliminary estimates of Ukrsots-Capital, by 2007 pension savings will reach five to six billion hryvnias and eighteen billion hryvnias by 2009, provided the combined wage fund increases by an annual 10%.
Yet the biggest concern of future pensioners is how safe their money will be in pension funds. According to Mr. Savchuk, its safety must be ensured by triple government control (the Securities and Stock Market Commission, Financial Markets Regulatory Commission, and the National Bank of Ukraine), which leaves asset management companies almost no opportunities to engage in fraudulent practices. Still, this won’t mean absolute guarantees either. Such guarantees might be provided by the state pension savings fund, but it will not be created until 2007, and it is still not known how much more time it will need to accumulate resources.
Despite all this, experts believe that two years from now private pension funds will be showing their first results, and in five years’ time they will become a major source of funding for the nation’s economy.
