Supervision of Voluntary Pension Fund Management Companies

VOLUNTARY PENSION FUNDS SECTOR IN

Third Quarter Report 2009

Supervision of Voluntary Pension Fund Management Companies

CONTENTS

1. INTRODUCTION ...... 3 Key Developments Influencing VPF Operations...... 3 Movements In Relevant Quarterly Indicators...... 4 2. MANAGEMENT COMPANIES ...... 7 Market Participants ...... 7 Ownership Structure...... 7 Organisational Network ...... 8 Fees Charged By Management Companies ...... 8 Transaction Costs...... 9 3. VPF OPERATIONS...... 10 VPF Net Assets...... 10 Composition Of VPF Assets...... 11 VPF Securities Trading ...... 12 Number And Structure Of VPF Users ...... 13 Contribution Payments, Withdrawals And Transfers Between Funds...... 19 Investment Unit Values...... 20 4. RETURNS ...... 21 5. CONCLUSION ...... 23

NATIONAL BANK OF SERBIA 2 Supervision of Voluntary Pension Fund Management Companies

1. INTRODUCTION

Key Developments Influencing VPF Operations

Chart 1: Movements in FONDex and net assets since the start of VPFs operations

2 3 2 1,300 7,000

1,250 6,000 8

1,200 5,000

1,150 4,000

FONDex 1,100 3,000

Net assets (mil RSD) 1,050 2,000 1 7 4 1,000 1,000

5 6 950 0 Nov Jan Mar May Jul Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Mar May Jun Jul Sep 2006 2007 2007 2007 2007 2007 2007 2007 2008 2008 2008 2008 2008 2008 2009 2009 2009 2009 2009 2009

1 – Transformation of three insurance companies into VPFs During the third quarter, work on 2 – Periods of rising prices on the Stock the amendment of the Law on voluntary pension funds and Exchange (BSE) pension schemes has been (value of BELEX15 on 15/11/2006: RSD 1,488; on intensified. The amendments of the 03/05/2007: RSD 3,304; on 24/09/2009: RSD 863) Law came as a result of taking into 3 – Periods of declining prices on the BSE account the practice in VPFs’ (value of BELEX15 on 11/03/2009: RSD 354) operations, real conditions on the 4 – Period of depreciation of the dinar financial market and the need to (RSD/EUR exchange rate on 03/10/2008: 76.69; on continuously improve their 28/01/2009: 96.34) functioning, with the aim of 5 – Period of increases in the key policy rate protecting interests of fund (on 29/10/2007: 9.75%; on 22/01/2009: 17.75%) members. 6 – Period of decrease in the key policy rate (on 10/7/2007: 12%) 7 – Period of the greatest withdrawal of funds 8 – Periods with highest amounts of fund transfers

NATIONAL BANK OF SERBIA 3 Supervision of Voluntary Pension Fund Management Companies

Movements In Relevant Quarterly Indicators

At end-Q3 2009, CPI rose CPI by 7.3% in comparison to the 9.0 same period last year. July and 8.5 August evidence decrease in 8.5 CPI by 0.9% and 0.1% 8.0 respectively, compared to the 8.0 previous month, with annual 7.5 7.3 increase of 8.5% and 8% respectively. September also 7.0 evidences an increase of 0.3% Jul Aug Sep in CPI compared to the previous month, with an annual increase of 7.3%. The downward trend in BELEX15 BELEX15, the blue-chip index 900 of the BSE, was discontinued by end-March 2009, whereafter it 800 picked up. During Q3 2009, the 700 index increased by nearly 45% in comparison to the previous 600 quarter and rose from 569 to 500 826. However, liquidity is still JulAug Sep low. The value of turnover on the BSE in Q3 2009 is less compared to the previous quarter and amounts to 4.2 billion RSD, i.e. 70 million per day. Alongside with the increase in share prices on the BSE, their portion in net assets rose from 6.9% (RSD 406 million) to 8.5% (RSD 560 million), mainly as a response to rising prices of shares in funds portfolios. However, this trend was not continued in Q4 2009, which is characterised by an increase in turnover, but also with a fall in the index. Despite all this, since August 2009, belex sentiment 1 has a value above 100. Current year is characterised by a fall in GDP (in 2008 there was an increase in GDP of 5.4%) and a slowdown in industrial production.

1 Indicator aimed at identifying expectations of relevant market participants in the sense of developing movement trends on the BSE in the next month. Value below 100 means negative, while value above 100 means positive expectations for the participants

NATIONAL BANK OF SERBIA 4 Supervision of Voluntary Pension Fund Management Companies

The dinar stabilised after its RSD/EUR Ehc hange rate strong depreciation in January 94.0 2009 at the value of 93 per one euro. Compared to end-Q2, the 93.5 euro lost 0.46% against the dinar. The highest value of the 93.0 dinar was 93.6, while its lowest 92.5 value came to 92.5 per one euro.

The greatest portion of assets 92.0 under the influence of the JulAug Sep exchange rate movements were government bonds, with a portion of slightly below 25% of total funds’ assets. The NBS lowered its key Key policy rate policy rate from 13% to 12% in 14.0 August and kept it at this level 13.5 throughout September as well. 13.0 This trend was continued in 13.0 October and November, when 12.5 12.0 12.0 the key policy rate was lowered 12.0 again to 11% and 10% 11.5 respectively. The lowering of the 11.0 key policy rate had an impact on Jul Aug Sep changes in the level of interest rates earned by companies on term deposits and funds on transaction accounts. On 30 September 2009, term deposits accounted for 4.5% of total assets, whereas transaction accounts made up 17.8%, which represents a decrease of nearly 10 pp in comparison to June 2009, as a response to increased funds’ participation on treasury bills auctions. In Q1 2009, three-month treasury bills appeared as a new financial instrument rather important for VPFs. These bills imply lower investment risk and offer on average a higher interest rate than that earned on funds on transaction accounts. Besides three-month and six-month treasury bills, the government began to issue one-year treasury bills in Q3. The third quarter saw 4 issues of bills at a discount rate ranging between 12.5% and 12.53%. Furthermore, in the same period, there were 12 issues of three-month treasury bills at the rate from 14.31 % (first issue) to 12% (last issue in the quarter), as well as 13 issues of six- month treasury bills at the rate from 13.99% (first issue) to 12.03% (last issue in the quarter). During Q3 the portion of treasury bills in net assets thus climbed from 34.1% to 43.5% in comparison to the previous quarter. At end-Q3, merely 1.2% of fund assets were invested in property. Therefore, given the current investment structure, a shock on the real estate market would not produce significant consequences in the VPF sector.

NATIONAL BANK OF SERBIA 5 Supervision of Voluntary Pension Fund Management Companies

At end-Q3, VPF net assets rose by 12.4% and 66% relative to end-Q2 and y-o-y respectively. A rise in net assets came mainly in response to payments of pension contributions and a higher investment value. The return on FONDex relative to the previous quarter FONDex 1,260 equalled 5%. Its value increased from 1,187 to 1,246. The index 1,240 increased mainly due to interest 1,220 2 rate revenue on treasury bills 1,200 and government bonds, taking 1,180 into account the high portion of 1,160 these securities in funds’ JulAug Sep portfolios. Increase in share prices on the BSE also had a positive impact on the value of the index. Exchange rate did not have much influence, given its stability in value (around 93 dinars per one euro).

Table 1: Movements in relevant quarterly indicators Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 CPI 3 10.9 8.6 9.4 8.3 7.3 EUR/RSD 76.60 88.60 94.78 93.44 93.01 exchange rate Key policy rate 15.75% 17.75% 16.50% 13.00% 12% BELEX15 1,003.77 565.18 380.83 569.27 825.97

FONDex 1,062.60 1,097.15 1,137.29 1,186.91 1,245.59

2 The decrease in the key interest also led to the decrease in treasury bills interest rates, but taking into consideration large portion of treasury bills (over 40%) in funds assets, their contribution to the growth of the index is still high 3 A rise in prices (in %) compared to the same period last year

NATIONAL BANK OF SERBIA 6 Supervision of Voluntary Pension Fund Management Companies

2. MANAGEMENT COMPANIES

Market Participants

National Bank of Serbia

Societe Generale banka Srbija Dunav DDOR Penzija Central Komercijalna plus Securities Depository banka and Clearing Garant House HYPO Erste Bank Brokers Custody banksCustody Srbija Nova penzija Soc. Gen. Stock Ekvilibrio Soc. Gen. Exchange Štednja Unicredit Bank Srbija Delta Raiffeisen Generali Future Triglav penzija

Securities Commission

The VPF market currently comprises nine companies that manage 10 VPFs, 4 custody banks, 113 natural persons and 5 agent banks. VPF management companies currently buy and sell securities through 17 brokerage houses.

Ownership Structure Insurance companies, banks and pension funds are qualified owners of all management companies. Table 2 below contains an overview of the ownership structure of management companies, classified by founder’s activity.

Table 2: Ownership structure by founder’s activity Qualified owner Management company Name Core activity Delta Generali Delta Generali Osiguranje, Beograd Insurance Raiffeisen Future Raiffeisen Bank, Beograd Bank Garant penzijsko društvo Skupina Рrva, Ljubljana Insurance DDOR Penzija plus DDOR Osiguranje, Novi Sad Insurance Dunav Dunav osiguranje, Beograd Insurance NLB Nova penzija NLB banka, Beograd Bank Nova Ljubljanska banka, Ljubljana Bank

NATIONAL BANK OF SERBIA 7 Supervision of Voluntary Pension Fund Management Companies

Qualified owner Management company Name Core activity Skupna pokojinska druzba, Ljubljana Pension fund Zavarovalnica Triglav, Ljubljana Insurance Triglav penzijski fondovi Triglav, družba za upravljanje, Ljubljana Pension fund Societe Generale Banka Srbija, Beograd Bank Societe Generale Penzije SOGECAP, Societe anonyme d’assurance Insurance sur la vie et de capitalisation, Pariz HYPO Hypo Alpe-Adria-Bank, Beograd Bank

Organisational Network The organisational network of management companies remained broadly unchanged in Q3 2009 and included 27 business units, branches and branch offices, most of which belong to a single management company. For the time being, most companies consist of head offices only. At end-Q3 2009, five banks4 engaged by six management companies, were providing agent services. Besides, the NBS issued two licenses to natural persons during Q3, to engage in dissemination of information on VPFs. Of 215 current licensees, 113 have already provided their services. At end-Q3, total employment in VPF management companies was 188, down by almost 5% in comparison to the previous quarter. The majority of employees are engaged in sales and marketing activities. Net assets of all funds per employee increased steadily to around RSD 35.2 million at end-Q3 2009, which means that it almost doubled in comparison to the same period last year.

Table 3: Net assets per employee at end-quarter In RSD million Q3 2008 Q4 200. Q1 2009 Q2 2009 Q3 2009 18.2 21.3 24.2 29.7 35.2

Fees Charged By Management Companies As market competition strengthened, Fees paid by fund members: contribution fees declined. Even though • contribution fees (up to 3% of the regulations set the maximum fee level at payment value); 3% of the contribution, the average fee • asset management fees (up to 2% charged by management companies in p.a. of the net asset value of the fund); • account transfer fees (based on Q3 was 2.52%. real transfer costs). The maximum asset management fee The level of fees charged by management companies must be disclosed in the chargeable is 2% p.a. of NAV. It is management company’s prospectus and on its website.

4 NLB banka a.d. Beograd, Raiffeisen banka a.d. Beograd, Volksbank a.d. Beograd, Hypo Alpe- Adria-Bank a.d. Beograd and Société Générale Banka Srbija a.d. Beograd.

NATIONAL BANK OF SERBIA 8 Supervision of Voluntary Pension Fund Management Companies calculated on a daily basis and deducted from fund’s assets. For fund members, it represents a hidden cost, but directly affects the investment unit value. All companies charge the maximum fee. Total fees charged by companies in Q3 equalled RSD 44.77 million. As in the previous quarter, total asset management fees exceeded total contribution fees. Namely, contribution fees were RSD 13.48 million or around 30% of total fees charged, while management fees came to RSD 31.27 million or 70% of total fees. Account transfer fees (based on actual costs of the transfer) totalled RSD 0.02 million or around 0.04% of fees charged.

Transaction Costs In Q3 2009, transaction costs came to RSD 2.13 million. Brokerage fees kept the highest share in transaction costs (around 57.6%). As in the previous quarter, the second largest share was that of custody bank fees (cca. 21.5%), followed by fees charged by the Central securities depository and clearing house (cca. 16.5%). Transaction costs are borne by management companies. In Q3, they made up around 4.76% of total fees charged for management company services. A rise in transaction costs in Q2 and Q3 as compared to Q1 came from the increased volume of fund trading, especially from frequent issues of treasury bills.

Chart 2: Composition of transaction costs in Q3 2009

Stock Exchange Custody bank fees fees 4.30% 21.52%

Central Securities Brokerage fees Depository fees 57.65% 16.53%

NATIONAL BANK OF SERBIA 9 Supervision of Voluntary Pension Fund Management Companies

3. VPF OPERATIONS

VPF Net Assets

Table 4: End-quarter net assets of the sector In RSD million Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 3,976.30 4,640.61 5,204.42 5,881.65 6,616.31

Net assets rose by 12.4% or over 66.3% compared to Q2 and the same period last year respectively. In Q3, members’ net contributions5 (RSD 419 million) were the main driver behind the growth in net assets. Total contributions, upon the deduction of contribution fee, came to RSD 522 million, whereas withdrawals amounted to RSD 103 million. In addition to the net payment of contributions, the funds’ return also impacted on growing net assets. In Q3, FONDex rose by 4.94%, while the year-to-date return came to 13.53%6. In the period of two years, the index of market concentration in the VPF sector declined from 10,000 (at the time of operation of one fund only) to 2,755, in response to the entry of new funds and an increase in the market share of funds that did not transfer their insurance assets. The continued decrease in the index value points to stronger competition in the VPF market, but its high value still implies high market concentration.

Chart 3: End-quarter concentration in the sector 2.950 2.920

2.900

2.850 2.832 2.788 2.800 2.754 2.755 2.750

2.700 Third quarter Fourth First quarter Second Third quarter 2008 quarter 2008 2009 quarter 2009 2009

5 Total contributions reduced by the contribution fee and withdrawals 6 Year-to-date (YTD), return relating to the period from the beginning of the year to the end of Q3

NATIONAL BANK OF SERBIA 10 Supervision of Voluntary Pension Fund Management Companies

Voluntary pension funds are classified into three groups according to their share in net asset value. During Q3, one fund transitioned from the group of small to the group of medium funds.

Table 5: Market share by scale Number of VPFs Share in net assets (%) Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Large (over 20) 2 2 2 2 2 Medium (5 –19.99) 2 2 2 2 3 Small (0 – 4.99) 4 6 6 6 5

Composition Of VPF Assets The composition of VPF assets also changed in Q3, mainly with regard to a further increase in the portion of treasury bills and a decline in the portion of funds on transaction accounts. Over the same period, the portion of shares rose negligibly in response to rising price on the BSE. Relative to a quarter earlier, the portion of shares on the BSE prime market (A listing) and other BSE markets in total fund assets rose by 0.7 pp and 0.9 pp respectively, compared to the previous quarter.

Chart 4: End-quarter composition of total fund assets7

Shares - BSE Transaction Receivables Prime Market (A accounts 0.01% Listing) Shares - Other Term deposits 17.77% ∆0.00 4.97% BSE markets 4.45% ∆-10.37 ∆+0.68 3.48% ∆+0.38 ∆+0.89 Property 1.17% Government ∆-0.15 bonds 24.64% ∆-0.87 Treasury bills 43.51% ∆+9.43

At end-Q3, almost RSD 2 billion or 30% of assets were euro-denominated, while almost RSD 4.6 billion or 70% of assets were denominated in the domestic currency. Euro-denominated assets consisted mainly of government bonds.

7 Changes are shown in percentage points relative to end-Q2 2009

NATIONAL BANK OF SERBIA 11 Supervision of Voluntary Pension Fund Management Companies

Government debt securities had the greatest portion in total fund assets – 68.2%, of which government bonds accounted for 24.6% and treasury bills for 43.5%. These were followed by transaction accounts – 17.8%, shares – 8.5% and term deposits – 4.5%. Compared to Q2, the exposure of fund assets to various types of market risks slightly changed.8 The percentage of assets exposed to the risk of change of securities prices was 33%. Due to higher investment in shares and a smaller portion of bonds, the exposure increased in respect of shares and declined in respect of government bonds. The exposure to property risk was low due to a small proportion of property in total fund assets. Around 33% of fund assets were exposed to currency risk and the exposure remained unchanged in comparison to Q2. Government bonds were directly affected by exchange rate movements. The greatest proportion of assets (cca. 73%) was exposed to interest rate risk. Government bonds were most exposed to interest rate risk as changes in interest rates directly affect the changes in prices.

Table 6: Exposure of funds assets to market risk

Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Currency risk Real state risk risk state Real securities prices prices securities Interest rate risk Risk of changes in in of changes Risk

Shares 3 11.3% 6.3% 4.8% 6.9% 8.5% Government bonds 3 3 3 29.1% 33.7% 34.8% 25.5% 24.6% Treasury bills 3 0.1% 0.0% 19.1% 34.1% 43.5% Property 3 3 1.7% 1.7% 1.5% 1.3% 1.2% Term deposits 3 4.5% 4.1% 4.6% 4.1% 4.5% Transaction accounts 3 49.5% 53.3% 33.7% 22.0% 13.3% (RSD) Transaction accounts 3 3.7% 0.9% 1.5% 6.1% 4.5% (foreign currency)

VPF Securities Trading The turnover of VPF trading in Q2 and Q3 2009 was significantly higher relative to Q1 and amounted to RSD 3,751 million and RSD 4,522 million respectively. These high amounts are in response to frequent issues of three- and six-month treasury bills, and also in response to including new information on the maturity of securities. Of the total turnover, around 96% concerned the purchase of treasury bills.

8 Breakdown of assets by the type of market risk they are directly exposed to

NATIONAL BANK OF SERBIA 12 Supervision of Voluntary Pension Fund Management Companies

The turnover on the BSE has been declining from the beginning of the year, however, funds continued to be active on the demand side. The purchase to sale ratio of securities amounted to 1.5, mainly due to the appearance of treasury bills. At the same time, the share of VPFs in the BSE turnover came to around 2.25% in Q3. Relative to a quarter earlier, the value of turnover on the BSE decreased by approximately 25% in Q3. The turnover of shares decreased by 20%, while the turnover of government bonds decreased by 35%. At the same time, the number of transactions remained unchanged.

Table 7: VPF securities trading in RSD million Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Turnover 298.8 475.4 1,221.7 2,358.7 4,521.8 Purchases of securities 234.8 342.4 1,159.6 2,200.9 2,698.5 Belgrade Stock Exchange 205.2 211.1 112.9 100.6 79.5 Over-the-counter 23.7 131.3 65.8 122.5 32.3 Government securities 5.9 - 980.9 1,977.7 2,568.8 auctions Sales of securities 64.0 133.0 62.1 157.8 37.6 Belgrade Stock Exchange 4.0 32.9 2.5 6.6 37.6 Over-the-counter 60.0 100.1 59.6 151.2 - Maturity 1.8 6.0 - 1,392.6 1,785.7 Ratio of purchases to sales 3.3 2.5 18.7 1.4 1.5 and maturity Share in total BSE volume 1.53% 2.19% 2.01% 1.57% 2.25%

Number And Structure Of VPF Users The total number of contributing users9 at end-Q3 2009, was 164,025, which represents an increase of 0.9% relative to end-Q2. The total number of membership contracts10 rose by around 1.5% to 214,390 members. At the same time, eight users, i.e. 12 membership contracts, who are receiving benefits, have scheduled payments. All information from this point forward, unless specified otherwise, refers to contributing users only. During Q3, VPFs have gained 3,133 new users, while 1,652 users have withdrawn all funds from their individual accounts, and therefore their membership ceased to exist.

9 The number of users is the number of persons who have a contract in one or more VPFs. This number is smaller than the number of members (membership contracts) as a significant number of individuals have more than one membership contract in the same or different funds 10 The number of membership contracts and the number of members refers to the sum of the number of individual membership contracts and the number of members of all pension plans

NATIONAL BANK OF SERBIA 13 Supervision of Voluntary Pension Fund Management Companies

The number and the relative share of users who are members of several funds were mildly higher than at end-Q2 (27,783 users or 16.94% of total number of users). The average amount of accumulated funds per user was RSD 40,297 or RSD 48,642 excluding users who have never made a contribution.

Table 8: Number of users by number of Таble 9: Number of users by number of funds in which they are members concluded membership contracts No. of funds No. of users No. of contracts No. of users 1 136,242 1 127,206 2 17,358 2 25,297 3 10,386 3 9,966 4 38 4 1,126 5 1 5 393 6 36 7 1

The number of users with at least one contribution payment (active users) came to 62,451 or 38.07% in Q3, which is less than in the previous quarter. In the last month of Q3, active users numbered 54,511 or 32.23% of the total number of users.

Table 10: Composition of users by payment frequency Period No. of users Share (%) 1 month 54,511 33.23 3 months 62,451 38.07 6 months 67,525 41.17

Active users 12 months 80,074 48.82 From the start of 135,885 82.84 membership (1) No funds on accounts (2) 28,140 17.16 Total (1+2) 164,025 100

Тable 11: VPF share in the number of users, by size No. of VPFs Share in the number of users (%) Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009

Large (20 and more) 2 2 2 2 2 Medium (5 – 19.99) 3 3 3 3 3 Small (0 – 4.99) 3 5 5 5 5

NATIONAL BANK OF SERBIA 14 Supervision of Voluntary Pension Fund Management Companies

A vast majority of VPF users in Serbia are domestic persons. At end-Q3, there were 26 foreign citizens or 0.02% of total number. On the other hand, given their 5 times higher average amount of funds on individual accounts, foreign persons participated with 0.08% in net assets of funds. In terms of gender, there were no significant changes in this quarter. Men remained dominant (61.3%), however, they still have on average less funds on their individual accounts. As a result, their share in net assets was 58.6%. Women, in comparison to men, proved to be more active in Q3 regarding the payment of contributions.

Table 12: Composition of users and their funds by gender11 Amount of Average Gender No. of users Share (%) funds Share (%) funds12 (in RSD mln) (in RSD) Male 100,558 61.32 3,873.27 58.65 38.518 Female 63,441 38.68 2,731.07 41.35 43.049

Chart 5: Ratio of the number of users to the number of inhabitants/employees13, by gender

28.1 Male 95.6 No. of users per 1000 inhabitants No. of users per 1000 16.8 Female employees 78.5

At end-Q3, the average age of VPF users was 43.3, while users aged 49 were the most numerous. Of the total number of users, 19% reached the pension eligibility age (53 years). The majority of new users in Q3 is among the age of 30 and 40 years. This category was also the most active one concerning the payment of contribution. The number of users who met the age requirement for the withdrawal of funds (53 years) remained unchanged and approximately accounted for 19% of the total.

11 Excluding foreign nationals 12 Excluding unallocated funds – money paid into the fund, but kept on a special account for the time being since there is not sufficient information for the allocation of contributions to members’ individual accounts 13 The latest available official communications of the Serbian Statistical Office were used as the source of data on the number of inhabitants/employees, by gender/region.

NATIONAL BANK OF SERBIA 15 Supervision of Voluntary Pension Fund Management Companies

Table 13: Age structure of users and funds14 Amount of Average funds Age No. of users Share (%) funds (in RSD Share (%) (in RSD) million) 0-19 200 0.12 2.68 0.04 13,383 20-29 14,202 8.66 377.52 5.72 26,582 30-39 45,817 27.94 1,914.15 28.98 41,778 40-49 54,960 33.51 2,440.88 39.96 44,412 50+ 48,820 29.77 1,869.12 28.30 38,286 50 6,127 3.74 6,127 4.16 44,821 51 5,657 3.45 5,657 3.77 44,016 52 5,708 3.48 5,708 3.77 43,655 53+ 31,328 19.10 31,328 16.60 34,995 Total 163,999 100 6,604.34 100

Chart 6: Distribution of users by age

7,000

6,000 5,000

4,000

3,000 2,000

1,000

0 0-9 10-19 20-29 30-39 40-49 50-59 60+ No. of users 39 161 14,202 45,817 54,960 42,450 6,370 Amount of funds 0.39 2.29 377.52 1,914.15 2,440.88 1,675.33 193.79

Table 14 shows the regional distribution of users and accumulated funds. Compared to a quarter earlier, there were no significant changes. The largest number of new users in Q3 is from the city of Belgrade (around 44%), and from the region of Nišava (around 18%). In respect of active users in Q3, the largest portion was in the city of Belgrade and the region of North Bačka (slightly

14 Excluding foreign nationals

NATIONAL BANK OF SERBIA 16 Supervision of Voluntary Pension Fund Management Companies

above 50%), while the smallest portion was in the regions of Rasina and Pomoravlje (below 20%).

Table 14: Regional distribution of users and funds15 Ratio of Amount of Average average No. of Share Share Town (District) funds (in funds (in funds to users (%) (%) RSD mln) RSD) gross wage16 City of Belgrade 53,702 32.75% 2,656.81 40.23% 49,473 0.90 Novi Sad (South Bačka) 19,778 12.06% 849.28 12.86% 42,940 0.94 Pančevo (South Banat) 10,780 6.57% 452.59 6.85% 41,985 0.97 Kruševac (Rasina) 9,511 5.80% 122.73 1.86% 12,904 0.38 Niš (Nišava) 7,637 4.66% 444.82 6.74% 58,246 1.63 (Pomoravlje) 6,848 4.18% 107.20 1.62% 15,654 0.44 Kikinda (North Banat) 4,923 3.00% 161.88 2.45% 32,881 0.82 Sremska Mitrovac (Srem) 4,737 2.89% 178.23 2.70% 37,626 0.98 Zrenjanin (Central Banat) 3,830 2.34% 124.82 1.89% 32,590 0.92 Kraljevo (Raška) 3,829 2.34% 178.16 2.70% 46,529 1.13 Sombor (West Bačka) 3,781 2.31% 111.36 1.69% 29,452 0.73 Čačak (Moravica) 3,781 2.31% 152.61 2.31% 40,363 1.11 Šabac (Mačva) 3,545 2.16% 98.28 1.49% 27,723 0.78 Užice (Zlatibor) 3,282 2.00% 132.03 2.00% 40,230 1.11 Kragujevac (Šumadija) 3,259 1.99% 111.08 1.68% 34,084 0.89 Požarevac (Braničevo) 3,039 1.85% 95.72 1.45% 31,498 0.72 Vranje (Pčinja) 2,824 1.72% 93.40 1.41% 33,074 1.00 Leskovac (Jablanica) 2,563 1.56% 97.51 1.48% 38,047 1.17 Zaječar (Zaječar) 2,479 1.51% 64.71 0.98% 26,103 0.77 Smederevo (Podunavlje) 2,132 1.30% 66.82 1.01% 31,341 0.75 Valjevo (Kolubara) 1,922 1.17% 57.03 0.86% 29,671 0.80 Subotica (North Bačka) 1,774 1.08% 95.54 1.45% 53,855 1.34 Bor (Bor) 1,685 1.03% 52.13 0.79% 30,937 0.77 Pirot (Pirot) 1,030 0.63% 38.86 0.59% 37,730 1.19 and Metohija 694 0.42% 31.91 0.48% 45,980 N/A Prokuplje (Toplica) 609 0.37% 27.71 0.42% 45,504 1.55 Total 163,974 100% 6,603.24 100%

15 Regions are administrative counties in the Republic of Serbia, except for Kosovo and Metohija where aggregate figure is provided. Data in the table refer to entire regions and not just the specified towns. The data shown exclude users whose residence is outside the Republic of Serbia, or who cannot be classified in any of the regions based on available data 16 An official communication of the Serbian Statistical Office, with the average figure for the first 9 months of 2009, was used as a source of data on average gross wage per region

NATIONAL BANK OF SERBIA 17 Supervision of Voluntary Pension Fund Management Companies

Chart 7: Ranking of regions in terms of the number of users relative to the number of inhabitants and concentration of users by region 38.6 Kruševac () 178.8 35.5 Pan čevo () 167.8 33.1 City of Belgrade 90.5 32.7 Novi Sad (South Bačka District) 105.0 31.7 Kikinda () 140.8

31.4 Jagodina (Pomoravlje District) 145.6 20.3 Niš (Nišava District) 89.2 19.6 Zaječar (Zaječar District) 94.8

19.6 Zrenjanin () 93.5 19.1 Sombor (West Bačka District) 90.8

Čačak () 17.4 67.0 15.8 Požarevac (Braničevo District) 82.0 14.4 Sremska Mitrovica () 76.6

Kraljevo (Raška District) 12.8 63.8 12.5 Bor () 59.1 12.3 Vranje (Pčinja District) 67.8

Šabac (Mačva Dis trict) 11.3 64.8 11.2 Kragujevac (Šumadija District) 49.9 11.2 Leskovac () 67.1

Užice () 11.0 49.9 10.6 Pirot () 41.9 10.6 Valjevo () 40.6

Smederevo () 10.4 53.3 9.2 Subotica (North Bačka District) 36.4 6.4 Prokuplje () 42.7

No. of users per 1000 inhabitants

No. of users per 1000 employees

NATIONAL BANK OF SERBIA 18 Supervision of Voluntary Pension Fund Management Companies

Contribution Payments, Withdrawals And Transfers Between Funds Total contributions paid in by fund members in Q3 amounted to RSD 535.6 million, which is at an average level of contribution payments by quarters in the last two years. The average user contribution in Q3 equalled RSD 3,252. Of total contributions, individual payments accounted for 19%, employer contributors for 38.9%, and pension schemes for 42.1%.

Chart 8: Volume and composition of total contributions

200

180 160 43.4% 140 39.3% 43.4% Pension schemes

120 100 Employer contributors

RSD mln RSD 80 37.5% 41.3% 38.1% 60 Individual payments 40

19.2% 19.4% 20 18.5% 0 Jul 2009 Aug 2009 Sep 2009 Relative to Q2, withdrawals have decreased by 11.5%. Total withdrawals came to RSD 103 million, of which lump-sum payments were the most dominant and amounted to 99.7%, while scheduled payments accounted for a small percentage. The average lump-sum payment in Q3 increased by 18.4% in comparison to Q2 and amounted to RSD 62,183. Transfers between funds reached RSD 34.4 million, down by 9% relative to Q2. The transfer fee is based on the actual cost of such transfer, i.e. payment transaction costs, and is deducted from fund member’s assets. Given that these costs are not high, they do not represent an impediment for members to transfer their accumulated funds to another VPF.

Table 15: Transfers between funds and withdrawals In RSD million Transfers between funds Withdrawals Q3 2008 74.03 50.93 Q4 2008 30.51 70.35 Q1 2009 24.95 97.56 Q2 2009 37.73 116.48 Q3 2009 34.37 103.06

NATIONAL BANK OF SERBIA 19 Supervision of Voluntary Pension Fund Management Companies

Investment Unit Values Investment unit values of all VPFs rose in Q3 as well. Negative trends on the BSE came to a halt in March 2009 and began to record positive values. The blue-chip index BELEX15 reached its maximum value in the last year. Such movements in stock prices had a favourable impact on the investment unit value. However, given a small portion of shares in the composition of funds assets, these changes produced no major impact on the increase in the investment unit value. In the same period, the dinar has strengthened by 0.46%. The exchange rate of the euro against the dinar declined from 93.44 to 93.01 at the period-end, which negatively affected the growth in foreign currency denominated assets. FONDex, the weighted average value of investment units of all funds, gained 5% and reached its maximum historical value.

Table 16: Movements in values of investment units and FONDex in Q3 2009

Beginning End of Maximum Minimum

of quarter quarter value value Delta Generali 1,145.87 1,209.79 1,213.98 1,141.52 Raiffeisen Future 1,334.54 1,369.20 1,369.20 1,334.54 Garant 1,144.76 1,178.67 1,180.33 1,142.96 DDOR Penzija plus 1,063.70 1,105.02 1,112.62 1,055.58 Dunav 1,032.58 1,090.23 1,096.39 1,023.64 Nova penzija 949.79 988.46 990.62 947.43 Triglav penzija 1,091.18 1,119.43 1,120.68 1,089.29 HYPO 1,112.15 1,140.22 1,140.22 1,112.15 Investment unit values Societe Generale Štednja 1,098.15 1,124.29 1,124.98 1,097.69 Societe Generale Ekvilibrio 1,086.76 1,135.72 1,139.40 1,084.30 FONDex 1,188.12 1,245.59 1,251.12 1,181.12

Chart 9: Movements in values of investment units and FONDex in Q3 2009

1,400 Raiffeisen Future 1,350 FONDex 1,300 Delta Generali 1,250 Garant

1,200 HYPO

1,150 Soc. Gen. Ekvilibrio 1,100 Soc. Gen. Štednja 1,050 Triglav penzija DDOR Penzija plus 1,000 Dunav 950 Nova penzija 900 Jul 2009 Aug 2009 Sep 2009

NATIONAL BANK OF SERBIA 20 Supervision of Voluntary Pension Fund Management Companies

4. RETURNS

At-end Q3 2009, eight funds operating over a year were obliged to report their returns for the past year, as well as from the start of operations until 30 September 2009.

Table 17: FONDex return Since the For the past year start of operations17 30/09/2008 31/12/2008 31/03/2009 30/06/2009 30/09/2009 7,9% -11,9% -7,0% 0,4% 3,7% 17,2% The purpose of investing VPF assets is to increase the value of invested funds, while at the same time minimizing the risks involved. Although all management companies aim to earn maximum possible returns to the benefit of fund members, the investment risk is not entirely eliminated and may even lead to negative returns. The returns earned by the fund are distributed to individual accounts of all members. What an average citizen is interested in most is the return of their fund, and/or return on their individual accounts. It is worth knowing that members in the same fund may have varied return on their individual accounts as the level of return depends primarily on the period when contributions were made and not the level of total contributions.

Chart 10: Number and share of users by intervals of return18

80,000 104,110 31,444 26,577 109,395 76.8% 23.2% 19.5% 80.5% 70,000 9,383 126,493 60,000 6.9% 93.1%

50,000 40,000

30,000

20,000 10,000

0 < -20 -15 -10 -5 0 +5 +10 +15 +20 < < -20 -15 -10 -5 0 +5 +10 +15 +20 < < -20 -15 -10 -5 0 +5 +10 +15 +20 < (%) First quarter 2009 Second quarter 2009 Third quarter 2009

17 Return on FONDex since the start of operations is annualized. Nominal return in the same period amounts to 24.6%. 18 The return on individual accounts was calculated at the Modified Dietz method. For users with several accounts, the average return per each account was calculated, weighted by the amount of accumulated funds

NATIONAL BANK OF SERBIA 21 Supervision of Voluntary Pension Fund Management Companies

At end-Q1 2009, 77% of users had a negative rate of return (from -5% to 0% for the majority), while end-Q2 2009 saw over 80% of users with a positive rate of return (between 0% and 5% for the majority). At end-Q3 around 93% of users had a positive rate of return (between 5% and 10% for the majority). The withdrawal of funds should be planned several years ahead. Furthermore, the Law envisages the possibility of withdrawal at the age of 53 to 70. Users are given the possibility to, several years (or a decade) before retirement, i.e. planned withdrawal of funds, keep their accumulated funds in a VPF with overly conservative investment policy19 as funds are thus protected from events on the stock exchange to a greater extent. Due to the contribution fee, which is included in the calculation of the return, all members who have just started paying in contributions, have a negative rate of return. As the time passes and funds operate positively, the return curve shifts.

19 Investment policy when the major portion of fund assets are invested in low-risk financial instruments with small changes in values. Given a lower risk, the return on these instruments is not high, but the decline in their values is not high either

NATIONAL BANK OF SERBIA 22 Supervision of Voluntary Pension Fund Management Companies

5. CONCLUSION

The Law on voluntary pension funds and pension schemes was adopted in October 2005, while its implementation began in April 2006. The Law provides an opportunity to make additional savings for the old age, by accumulating funds in VPF, which are managed by pension companies. The economic crises that stroke the whole world did not leave our country immune to adverse economic developments. Share prices on the stock exchange were decreasing, the dinar depreciated, and the economy, after exhibiting growth for a couple of years, fell into recession. The negative effects were felt by VPFs as well, which caused the decrease on the return of FONDex. Funds were not even operating for a full year when they had to face challenges on the capital market. They made repeated attempts to absorb the unfavorable effects of systemic disturbances by pursuing conservative investment policies, i.e. by constantly reducing investment in risk-bearing financial instruments in order to shield their members’ assets from losses to the extent possible. Therefore, investment in shares was significantly reduced, from the portion of 24% in net assets to less than 5% of net assets. The portion of transaction accounts increased to 55% of net assets, while the portion of government bonds was kept at a steady level of nearly one-third of net assets. As a consequence of such a structure, FONDex value did not even once fall below its value at the beginning. Since October 2008, investment unit values are constantly increasing, and during September 2009 FONDex exerted its maximum value since the start of funds operations and an annual return of about 17%. This increase came in response to high interest rates, as well as to increase in share prices on the stock exchange. The appearance of treasury bills on the market caused a great attention of management companies. Since February 2009, when 3-month treasury bills were issued for the first time, their portion was constantly increasing and now treasury bills represent over 40% of net assets. Shortly after their appearance, 6- month and one-year treasury bills emerged on the market. Nevertheless, the financial market in Serbia is still underdeveloped, with a limited number of financial instruments. Foremost, the market suffers from a lack of long-term dinar denominated financial instruments, which would enable more adequate diversification and more opportunities for investment.

NATIONAL BANK OF SERBIA 23