Supervision of Voluntary Pension Fund Management Companies

VOLUNTARY PENSION FUNDS SECTOR IN

Third Quarter Report 2008

November 2008 Supervision of Voluntary Pension Fund Management Companies

CONTENTS

1. INTRODUCTION...... 3 2. MANAGEMENT COMPANIES ...... 4 Market participants...... 4 Ownership structure...... 5 Organizational network ...... 6 Fees charged by management companies ...... 7 Transaction costs...... 7 3. OPERATIONS OF VOLUNTARY PENSION FUNDS...... 8 Net assets of voluntary pension funds ...... 8 Composition of assets of voluntary pension funds...... 9 Stock exchange trading by pension funds ...... 10 Number and structure of users of VPF services ...... 11 Contribution payments, disbursements and transfers among funds...... 17 Values of investment units and returns of funds...... 18 4. REGIONAL PERSPECTIVE...... 20 5. CONCLUSION ...... 21

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

1. INTRODUCTION

In Q3 2008, nine voluntary pension fund management companies managed eight voluntary pension funds in Serbia’s VPF market. All market participants displayed notable interest in further development of the market. Voluntary pension fund HYPO received its first contribution payments, while payments to other funds went up, primarily on account of new entrants to the pension scheme. Although total contribution payments went up, the increase in the number of members making individual contribution payments was not significant because of Serbia’s still relatively low standard of living, inflation, lower-than-expected returns on account of negative trends in the capital market and the costs for fund members in the form of fees on contribution payment and management fees. As in Q2 returns were low and fees were high, third-quarter growth in net fund assets was lower than total payments made in that quarter. From 30 June until 30 September, the blue-chip index of the Stock Exchange, Belex15, lost 44% of its value, approaching the psychological floor of RSD 1,000 towards late Q3. Management companies’ investment policies were conservative throughout the quarter. Hence, investment in shares came to just 11.4%, well below the maximum allowed (60% of fund’s assets). Most of such shares were included on the ’s A List (Tigar, and ), but their prices slid during Q3 to hit annual lows in late September. In Q3, the A List also came to include the shares of Metals banka in which funds invested a total of 0.03% of their assets. The spillover of the global financial crisis into the domestic capital market did not lead to a downturn in property prices. Even if there had been a decline, its effects would not have been important as only 1.7% of funds’ assets were invested in property at end-Q3. If, however, companies decided to invest 15% of funds’ assets in property (which is the legally prescribed maximum), the impact would be much stronger.

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

2. MANAGEMENT COMPANIES

Market participants In Q3, nine management companies managed the assets of eight voluntary pension funds, four custody banks, 95 private individuals and 5 agent banks in Serbia’s VPF market. In the quarter earlier, two new voluntary pension fund management companies were set up: SOCIETE GENERALE PENZIJE a.d. Beograd and VPF management company HYPO a.d. Beograd. VPF management company SOCIETE GENERALE PENZIJE a.d. Beograd is the first such company to set up two voluntary pension funds – Societe Generale Štednja and Societe Generale Ekvilibrio. The two funds will differ primarily in the level of conservativeness of their respective investment policies.1 In Q3, the above funds did not yet begin collecting contributions, while the voluntary pension fund HYPO published its first investment unit value on 4 August 2008. With the start of operations of the voluntary pension fund HYPO, Erste Bank Srbija a.d. began operating as the custody bank for this fund. The number of banks providing custody services to voluntary pension funds thus increased to four. In addition to maintaining fund accounts, banks also have an important control function. Increased competition in the custody banks market would, therefore, act to improve service quality, thereby enhancing the security of the voluntary pension funds system. Fund management companies currently buy and sell securities through 15 broker companies (compared to 12 at end-Q2).

1 Societe Generale Štednjа targets more conservative investors and Societe Generale Ekvilibrio moderately conservative investors.

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

NATIONAL BANK OF SERBIA

Societe Generale Banka Srbija Dunav DDOR Penzija plus Komercijalna Central banka Securities Garant Depository Hypo

Erste Bank Brokers

Custody banks Custody Srbija Raiffeisen NLB Nova penzija Future Stock Triglav Exchange Unicredit Bank Srbija Delta Generali

Securities Commission

Ownership structure Insurance companies, banks and pension funds are the qualifying owners of all management companies operating in Serbia. Table 1 below gives a detailed overview of the ownership structure of management companies, classified by founder’s activity.

Table 1: Ownerships structure by founder’s activity Qualifying owner Management company Name Core activity Delta Generali, Beograd Delta Generali Osiguranje, Beograd Insurance Raiffeisen Future Raiffeisen Bank, Beograd Bank Garant penzijsko drustvo Skupina prva, Ljubljana Insurance DDOR Penzija plus DDOR, Novi Sad Insurance Dunav , Beograd Insurance Continental banka, Novi Sad Bank NLB LHB banka, Beograd, Bank NLB Nova penzija Nova Ljubljanska banka, Ljubljana Bank Skupna pokojinska družba, Ljubljana Pension fund Zavarovalnica Triglav, Ljubljana Insurance Triglav penzija 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

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

Organizational network One of the two companies granted the operating license in June began its operations in Q3. As a result, the organizational network now includes 27 business units, branches and branch offices, most of which belong to a single management company. For the time being, most companies have head offices only. On the other hand, four management companies engaged banks as their agents, thereby indirectly expanding their network. At end-Q3 2008, four banks2 engaged by four management companies provided agent services. As founders of the two newly established companies, the banks Societe Generale and Hypo AlpeAdria will probably act as their agents, which is likely to increase the significance of agency by banks. Moreover, in Q3 the National Bank of Serbia issued additional 10 licenses to private individuals to engage in the dissemination of information on voluntary pension funds. Of 173 persons holding the above license, 95 have already been hired. Total employment in management companies came to 213, with the majority of employees engaged in sales and marketing activities. Total assets of all funds per employee increased steadily to reach around RSD 18.7 billion at end-Q3 2008.

Table 2: Total assets per employee at end-quarter in RSD mln Q4 2007 Q1 2008 Q2 2008 Q3 2008

15.6 15.9 18.5 18.7

2 NLB LHB banka Beograd a.d. Beograd, NLB Continental banka a.d. Novi Sad, Raiffeisen banka a.d. Beograd and Volksbank a.d. Beograd.

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

Fees charged by management companies As market competition Fees paid by fund members include: strengthened, contribution payment fees • fee on contribution payment (up to declined. And though regulations set the 3% of the payment) maximum fee level at 3% of the • fund management fee (up to 2% of the fund’s assets value, per annum) payment value, the average fee charged • account transfer fee (based on the by management companies in Q3 2008 actual costs of transfer). was 2.5%. The level of fees charged by a management company must be published The fund management fee may in the prospectus and on the equal no more than 2% p.a. of the management company’s website. annual value of the fund’s assets. This fee is calculated and deducted from the value of the fund’s assets on a daily basis. For fund members, this is a hidden cost, but it directly affects the investment unit value. No company has lowered this fee as yet. Total fees charged by companies in Q3 equalled RSD 34.3 million. As in the quarter earlier, total management fees exceeded total fees on contributions. Namely, contribution fees equalled RSD 15.1 million, or 44.1% of total fees charged, management fees came to RSD 19.1 million, or 55.7% of total fees charged, while the remaining 0.2% or RSD 0.08 million referred to account transfer fees (based on actual costs of transfer).

Transaction costs In Q3 2008, transaction costs came to around RSD 1.3 million, up by around 71% on Q2. Such high increase in transaction costs was due to an increase in trading in Q3 by 87% relative to Q2. Brokers’ fees still account for the highest share of transaction costs. By contrast to a quarter earlier, the second largest share was that of stock exchange fees which increased by around 20 percentage points, while custody bank fees declined by around 7 percentage points. Transaction costs are borne by companies. In Q3, they made up 3.67% of total fees charged for management company services or around 1.2 percentage points less than in Q2.

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

Chart 1: Composition of transaction costs in Q3 2008

0.80% 26.35% 29.05%

7.77%

36.02%

Stock exchange fees Broker's fees CSD f ees Custody bank fees Tax on the transfer of title to securities

3. OPERATIONS OF VOLUNTARY PENSION FUNDS

Net assets of voluntary pension funds

Table 3: End-quarter net assets of the sector in RSD mln Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 2,563.26 3,045.63 3,177.11 3,719.00 3,976.30

In Q3 2008, net assets rose by 6.92% relative to 30 June 2008. Fund members’ contributions were the main driver behind growth in net assets. In addition to rising contribution payments, another major input to growth came from lower withdrawals of moneys during Q3. Namely, whereas in Q2 one-off withdrawals of moneys came to RSD 60 million, in Q3 they equalled RSD 51 million or 15% less. In Q3, the FONDex dropped by around 7%. At end-2006, the index of market concentration3 in the voluntary pension funds sector equalled a maximum of 10,000, as only one company was operating at the time. Following the entry of new funds and an increase in the market share of funds which did not inherit assets from insurance operations,

3 Herfindahl-Hirschman (HHI) index has been used as a measure of market concentration since 1982. It is calculated by squaring the share of a specific variable (i.e. balance sheet total, deposits, credits…) of all market participants in a given sector and then summing up the resulting numbers. An index below 1000 indicates no market concentration. An index between 1000 and 1800 indicates moderate concentration, while an index above 1800 indicates high concentration.

NATIONAL BANK OF SERBIA 8 Supervision of Voluntary Pension Fund Management Companies this index has been on a constant decrease. In Q3, it thus came to 2920, down from Q2 when it equalled 3110. Although this points to increased competitiveness, the market of voluntary pension funds remains highly concentrated.

Chart 2: End-quarter concentration in the sector

4,000

3,523 3,500 3,311 3,196 3,110 2,920 3,000

2,500

2,000 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008

Voluntary pension funds have been classified into three groups according to their share in total net assets. In Q3, due to a slight drop in value, one fund was downsized from the group of large- to the group of middle-sized funds (which had previously included only one fund).

Table 4: Market share by size Share of net assets (%) Number of voluntary pension funds Q1 Q2 Q3 Large (over 20) 3 3 2 Medium (5 – 19.99) 0 1 2 Small – from (0 – 4.99) 4 3 3

Composition of assets of voluntary pension funds The composition of assets changed in Q3 as the share of transaction Investment in property includes investment in land, buildings and special accounts went up and that of shares parts of buildings which must be entered declined. Such decline was mostly due in the land register and insured against to adverse financial market all risks. Up to 5% of the fund’s assets can be invested in a single property, developments. while total investment in property may As of 1 April 2008, funds may not exceed 15%. invest up to 10% of total assets in shares which are not on the Belgrade Stock Exchange’s A List but meet all the

NATIONAL BANK OF SERBIA 9 Supervision of Voluntary Pension Fund Management Companies requirements prescribed by the Decision on Maximum Investment. The share in total fund assets of shares not included on the A List and of the shares included on the Belgrade Stock Exchange’s A List declined by 2 and 4 percentage points, respectively, from a quarter earlier. At end-Q3 2008, of total assets, RSD 1.3 billion or 33% was foreign currency-denominated while RSD 2.6 billion or 67% was in the domestic currency. Assets in referred primarily to bonds issued against frozen foreign currency savings deposits. This ratio remained broadly constant over the past year. Transaction accounts accounted for the highest share of total fund assets, with 53.15%. Next were debt securities with 29.38%, shares with 11.35% and term deposits with 4.55%.

Chart 3: Composition of total fund assets at end-Q34

Shares - А Claims List Shares not included Property 0.04% 6.38% in 1.69% ∆-0.06 ∆-4.05 the A List ∆-0.15 4.97% ∆-1.90

FFCY bonds 29.08% Demand deposits Treasury ∆-0.84 Term 53.15% bills deposits ∆+6.54 0.15% 4.55% ∆+0.10 ∆+0.28

Stock exchange trading by pension funds The volume of VPF trading rose in Q3 2008 relative to Q2. As the overall volume of trading in the Belgrade Stock Exchange dropped notably during the same period, the ratio of VPF trading to total stock exchange trading came to 2.19%. Relative to a quarter earlier, the value of trading in shares in the BSE declined by over 50%, while the number of transactions dropped by over 30%.

4 Shows changes relative to end-Q2 2008, in percentage points.

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

The value of trading in frozen foreign currency savings bonds decreased by over 15%, while the number of transactions increased by around 6%. As around 78% of trading by VPF referred to the purchase of securities, in Q3 2008 funds continued to be active on the demand side.

Table 5: VPF share of BSE trading in RSD mln Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Volume of VPF trading 622.93 610.00 495.83 159.96 298.90 Share of BSE trading 1.94% 1.72% 2.85% 0.54% 2.19% Volume of securities 506.65 473.87 353.53 141.67 234.89 purchases by VPF Share of BSE trading 1.58% 1.33% 2.03% 0.48% 1.72%

Number and structure of users of VPF services The total number of users5 at end-Q3 came to 156,977, up by 6% relative to end-Q2. The total number of contracts also increased (by 4%) and reached 202,762. At the same time, the number of users holding accounts in several funds declined in relative terms down to 24,370 or 15.5% of the total. The average amount of moneys per user was RSD 25,328.70, or RSD 30,058.77 excluding users which never made the contribution payment.

Table 6: Number of users by number of Table 7: 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 1 132,607 1 123,614 2 15,268 2 23,283 3 9,074 3 8,271 4 27 4 1,322 5 1 5 443 6 42 7 2

The number of users which made at least one contribution payment (active users) in Q3 2008 came to 73,640 or 46.91% of the total. In the final month of the quarter, active users numbered 62.999 or 40.13% of the total.

5 A user is an individual, with a unique personal identification number or passport number (for foreign persons), who may hold one or more individual accounts in one or more pension funds.

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

Table 8: Breakdown of users by frequency of payment Period No. of users Share (%) 1 month 62,999 40.13% 3 months 73,640 46.91% 6 months 78,114 49.76%

Active users 12 months 102,867 65.53% From start of 132,275 84.26% membership (1) No moneys in the account (2) 24.702 15,74% Total (1+2) 156.977 100,00%

Table 9: Share in number of users, by size Share in number of users (%) No. of VPF

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

At end-Q3, the majority of users of VPF services were men, although their share declined slightly on a quarter earlier to 61.4% of all users. At the same time, the share of the male population in total fund assets was 59.4%, as the female population tends to deposit higher amounts to their individual accounts. Compared to men, a larger percentage of women are active users; in Q3, that difference came to almost 7 percentage points.

Table 10: Breakdown of users by gender No. of users Amount of moneys Average moneys Gender (± 0.06%) (in RSD mln) (in RSD) Male 96,394 2,358.97 24,472.22 Female 60,496 1,613.82 26,676.45

The ratio of the number of users to the number of inhabitants and the number of employees of a given gender (according to RSO data for 2007 and March 2008) reveals that men account for a higher percentage of users of VPF services.

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

Chart 4: Ratio of number of users to number of inhabitants/employees, by gender

26.86 Male 85.42 No. of users per 1000 inhabitants

No. of users per 1000 employees 15.95 Female 68.93

Average user age at end-Q3 was 43.5, while the majority of users were 48 years old. One in five users is eligible for withdrawal of moneys (53 years of age)

Chart 5: Distribution of users by age, end of Q3

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+ Number of users 31 181 13,640 42,177 52,976 42,174 5,711 Amount of moneys 0.27 1.68 246.13 1,116.98 1,453.32 1,037.26 117.15

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

Table 11: Age structure of users Amount of Average Share Share Age No. of users moneys moneys (%) (%) (in RSD mln (in RSD) 0-19 212 0.14% 1.95 0.05% 9,216.28 20-29 13,640 8.69% 246.13 6.20% 18,044.56 30-39 42,177 26.88% 1,116.98 28.12% 26,483.14 40-49 52,976 33.77% 1,453.32 36.58% 27,433.50 50+ 47,885 30.52% 1,154.41 29.06% 24,108.07 50 5,321 3.39% 148.91 3.75% 27,984.74 51 5,466 3.48% 148.50 3.74% 27,167.98 52 5,764 3.67% 161.31 4.06% 27,985.93 53+ 31,334 19.97% 695.70 17.51% 22,202.62 Total 156,890 100.00% 3,972.79 100.00%

In Q3, the regional distribution remained broadly unchanged. In terms of the number of users relative to the number of inhabitants of a given region, Rasina, Zajecar and Pomoravlje Regions still top the list. On the other hand, it is precisely these three regions that recorded the lowest average amount of moneys per user as well as the smallest percentage of active users (well below 20% in the final month of Q3 for each of the regions).

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

Table 12: Regional distribution of users and moneys at sector level6 Amount Ratio of of Average average Number of Share Share Town (region) moneys moneys moneys to users (%) (%) (in RSD (in RSD) gross mln) wages City of Belgrade 47,250 31.44% 1,390.00 35.92% 29,417.94 0.54 Novi Sad (South Backa Region) 16,776 11.16% 518.60 13.40% 30,913.49 0.65 Kruševac (Rasina Region) 11,476 7.64% 76.99 1.99% 6,708.67 0.19 Pančevo (South Banat Region) 8,979 5.97% 317.16 8.20% 35,321.88 0.76 Niš (Nišava Region) 7,309 4.86% 295.27 7.63% 40,398.14 1.09 Jagodina (Pomoravlje Region) 6,607 4.40% 65.14 1.68% 9,858.84 0.27 Zaječar (Zaječar Region) 4,614 3.07% 42.43 1.10% 9,195.28 0.27 Sremska Mitrovica (Srem 4,303 2.86% 98.44 2.54% 22,878.10 0.54 Region) Kikinda (North Banat Region) 4,259 2.83% 85.52 2.21% 20,079.42 0.49 Zrenjanin (Central Banat Region) 3,887 2.59% 150.95 3.90% 38,834.34 0.93 Kraljevo (Raška Region) 3,785 2.52% 70.83 1.83% 18,714.23 0.52 Čačak (Morava Region) 3,651 2.43% 92.06 2.38% 25,215.08 0.70 Užice (Zlatibor Region) 3,441 2.29% 81.59 2.11% 23,712.51 0.62 Sombor (West Banat Region) 3,174 2.11% 74.30 1.92% 23,409.56 0.55 Kragujevac (Šumadija Region) 3,109 2.07% 54.92 1.42% 17,664.90 0.46 Vranje (Pčinje Region) 2,866 1.91% 69.00 1.78% 24,076.74 0.74 Požarevac (Braničevo Region) 2,803 1.86% 59.08 1.53% 21,077.32 0.47 Leskovac (Jablanica Region) 2,135 1.42% 66.89 1.73% 31,328.76 0.96 Šabac (Mačva Region) 1,805 1.20% 54.89 1.42% 30,410.73 0.82 Smederevo (Podunavlje Region) 1,776 1.18% 39.61 1.02% 22,300.27 0.48 Subotica (North Backa Region) 1,715 1.14% 57.44 1.48% 33,490.68 0.82 Valjevo (Kolubara Region) 1,378 0.92% 29.70 0.77% 21,556.55 0.58 Bor (Bor Region) 1,218 0.81% 26.14 0.68% 21,462.61 0.52 Pirot (Pirot Region) 925 0.62% 22.41 0.58% 24,224.59 0.75 Kosovo and Metohija 589 0.39% 15.33 0.40% 26,027.76 --- Prokuplje (Toplica Region) 474 0.32% 15.39 0.40% 32,465.88 1.06 Total 150,304 100.00% 3,870,08 100.00%

The remaining 6,673 users or 4.25% reside outside the Republic of Serbia, or cannot be classified as residing in any of the above regions, based on the available data.

6 Regions are administrative counties in the Republic of Serbia, save for Kosovo and Metohija where aggregate figure was provided. Data in the table refer to entire regions and not just the specified towns. Gross wages mean average gross wages in the first nine months of 2008, according to the reports of the RSSO.

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

Chart 1: Ranking of regions in terms of number of users relative to number of inhabitants and concentration of users by region

46.11 Kruševac (Rasina Region) 231.98 36.03 Zaječar (Zaječar Region) 165.67 30.04 Jagodina (Pomoravlje Region) 109.17 29.33 Pančevo (South Banat Region) 123.38 29.32 City of Belgrade 75.38 27.81 Novi Sad (South Backa Region) 76.84 27.10 Kikinda (North Banat Region) 116.29 19.67 Zrenjanin (Central Banat Region) 92.06 19.39 Niš (Nišava Region) 75.40 16.70 Čačak (Morava Region) 68.90 15.79 Sombor (West Banat Region) 69.37 14.45 Požarevac (Braničevo Region) 69.28 12.97 Sremska Mitrovica (Srem Region) 65.69 12.71 Kraljevo (Raška Region) 52.90 12.50 Vranje (Pčinje Region) 65.20 11.39 Užice (Zlatibor Region) 51.00 10.63 Kragujevac (Šumadija Region) 45.37 9.37 Pirot (Pirot Region) 35.12 9.21 Leskovac (Jablanica Region) 59.48 8.93 Bor (Bor Region) 40.07 8.81 Subotica (North Backa Region) 29.95 8.63 Smederevo (Podunavlje Region) 39.11 7.49 Valjevo (Kolubara Region) 29.74 5.69 Šabac (Mačva Region) 30.06 4.88 Prokuplje (Toplica Region) 28.65

No. of users per 1000 inhabitants

No. of users per 1000 employees

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

Contribution payments, disbursements and transfers among funds Total contributions paid by fund members in Q3 2008 came to around RSD 600 million. This is an increase by 6% relative to Q2 2008, when total contributions equalled RSD 566 million. Average member contribution came to RSD 3,575 in Q3 and RSD 3,310 in September. Of total contributions, around 27% referred to individual payments, 30% referred to employer contributors, while the highest percentage of around 43% referred to pension schemes.

Chart 2: Volume and composition of total payments

250.00

200.00 35.13% 48.08% Pension schemes 45.74%

. 150.00

дин 26.73%

. Contributors

млн 100.00 33.36% 31.10% Individual payments 50.00 38.14% 18.56% 23.16%

0.00 Jul 08 Aug 08 Sep 08

Withdrawals of moneys declined relative to Q2. The bulk of withdrawals referred to one-off payouts, while programmed payouts accounted for less than 1% of the total. Transfers among funds remained practically unchanged relative to Q2. The transfer fee is based on the actual costs of such transfer, i.e. payment system costs, and is deducted from the fund’s assets. These costs are not high and do not represent an impediment for fund members to transfer their moneys to another fund.

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

Table 13: Transfers among funds and permanent withdrawal of moneys in the sector at end-Q3 2008 in RSD mln Transfers among funds Withdrawal of moneys Q1 2008 58.32 202.12 Q2 2008 72.24 61.19 Q3 2008 74.03 50.94

Values of investment units and returns of funds Investment unit values of most voluntary pension funds declined in Q3. This was due to negative trends in the global financial market which spilled over to the Belgrade Stock Exchange. The blue-chip index Belex15 lost around 44% of its value in Q3, while the dinar strengthened by around 3% in the same period. The exchange rate of the dinar against the fell from RSD 78.98 at the start to RSD 76.60 at the end of the period. Such movements in share prices on the stock exchange negatively affected the value of the investment unit, but did not lead to any major drop in investment unit value as the proportion of shares in total funds’ assets declined. However, the FONDex, as the weighted average value of investment units of all funds, lost around 7% of its value.

Table 14: Values of investment units and FONDex in Q3

End of Minimum Start of quarter Maximum value quarter value

Delta Generali 1,123.75 1,043.63 1,123.75 1,043.63 Raiffeisen Future 1,199.51 1,210.13 1,211.43 1,197.07 Garant 1,121.26 1,058.53 1,121.38 1,058.53 DDOR Penzija plus 993.47 903.16 993.47 903.16 Dunav 996.96 930.14 996.99 930.14 NLB Nova penzija 966.92 876.61 966.92 876.61

Investment unit value Triglav 1,009.35 960.36 1,009.35 960.36 Hypo 1,017.24 1,018.63 1,000.35 FONDex 1,139.60 1,062.60 1,139.60 1,062.60

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

Chart 3: Movements in values of investment units and FONDex in Q3

1,250

Raiffeisen Future 1,200

1,150

1,100 FONDex 1,050 Garant RSD Delta Generali HYPO 1,000 Triglav penzija 950 Dunav DDOR 900 Penzija plus Nova penzija 850 Jul-08 Aug-08 Sep-08

At end-Q3 2008, seven funds operating for over a year had the obligation to report their returns for the past year and returns earned since the start of their operations until 30 September 2008.

Table 15: FONDex return In the past year Since the start 7 of operations 31 Dec 2007 31 Mar 2008 30 Jun 2008 30 Sep 2008

FONDex 3.29 11.65 -2.84 -2.12 -11.9

The purpose of investing VPF’s assets is to raise the value of invested funds, while at the same time minimizing the risks. Although all companies aim to earn maximum possible returns to the benefit of fund members, investment risk is never entirely eliminated and there is always a possibility that the returns on the investment of fund’s assets will be negative. The returns earned by the fund are distributed to individual accounts of all members.

7 FONDex return since the start of operations is given at annual level. Nominal return in the same period came to 6.26%.

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

4. REGIONAL PERSPECTIVE

Data on the regional perspective are derived from available statistics as at 31 December 2007. Although monthly data are available for some countries (e.g. Croatia and Hungary), the latest available data for all countries were used to ensure data comparability. The comparative analysis does not include Macedonia, and Bosnia and Herzegovina as these countries either do not have the third pension insurance pillar (voluntary private insurance) or, if they have it, it is not yet operational. It should also be noted that not all countries have introduced all three pension insurance pillars. Countries with a developed second pillar (mandatory private insurance funds) typically have an underdeveloped third pillar (voluntary private pension funds). It would, therefore, be best to compare only those countries which have the same voluntary pension fund systems.

Table 16: Voluntary pension funds as at 31 December 20078 Pension No. of Supervisory No. of Start of Share in no. Share in no. Total assets Share of Country funds members authority VPF work of inhabitants of employees (in € mln) GDP system (in 000) Hungary 1, 2, 3 HFSA 68 1994 1,400 13.80% 35.80% 3,096 3.20% Romania 1, 2, 3 CSSPP 7 2007 51 0.20% 1.10% 3 0.004% Croatia 1, 2, 3 HANFA 6 2002 104 2.3% 5.3% 94,6 0.25% Bulgaria 1, 2, 3 FSC 9 2000 593 7.8% 12.6% 325 1.2% Slovakia 1, 2, 3 NBS 59 2005 792 14.5 % 35.2 % 755 1.48 % Czech Rep.10 1, 3 CNB 10 1994 3,900 37.8 % 76.5 % 6,300 5.3 % Serbia 1, 3 NBS 7 2006 158 2.14% 7.9% 38.4 0.15%

Table 17: Structure of investment of total assets as at 31 December 2007 (in %) Government Domestic Foreign Investment Deposits Country Shares Property Other securities bonds bonds funds and cash Hungary 63.1 2.2 15.3 17.3 2.1 Romania 21 1 1 7 70 0 Croatia 43.8 1.4 0.1 24.4 22.3 7.9 0.1 Bulgaria 9.94 13.30 20.88 32.11 4.39 17.3 2.08 Czech Rep. 58.6 16.6 5.9 4.5 0.8 9.6 4 Slovakia 47 3.48 45.2 4.32 Serbia 37.9 22.4 38.8 0.9

8 Data in the table refer to the third pillar of the pension funds system. 9 Five management companies. Subject to the Law, each company must set up and manage at least one contributory supplementary pension fund and at least one payout supplementary pension fund. 10 There are no management companies as separate legal entities managing the funds, but the fund itself has legal entity status. Pension fund contributions are subsidized by the government, while the minimum level of return is guaranteed by management companies.

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

5. CONCLUSION

Voluntary pension funds have been operating in our market for less than two years, which is a relatively short time period given the long-term character of this financial institution. Since mid-2007, the business environment in which the companies operated was not exactly favourable for the financial sector at large. Global financial crisis caused major disturbances in all international stock exchanges, including the Belgrade Stock Exchange. The value of the blue-chip index, BELEX15, declined. Despite this, net assets of voluntary pension funds have been on a constant increase, and are around 55% higher than in the corresponding period a year earlier. There is notable scope for development of the sector as the share of funds’ net assets in GDP comes to around 0.15%, which is well below the European (15%) and the regional average (5%). In addition, only 7.4% of employed persons have entered into membership agreements with any existing fund. The voluntary pension funds market is still highly concentrated, but there is potential for setting up new and expanding existing funds. To illustrate, in just over 1 year of operations, one of the funds managed to gain a market share of over 5%. The founding of two new management companies and three voluntary pension funds also points to strong interest of both founders and users of VPF services. The development of the organizational network of companies is an important factor for increasing the market share of funds and banks play a major role in achieving this objective. Banks are, namely, the only financial institutions that can act as agents and, given the scope and accessibility of their organizational network, the use of this sales channel appears likely to give a comparative advantage. Preservation of macroeconomic and financial stability is a precondition to a faster development of the voluntary pension funds sector. This, however, calls for responsible and professional conduct of all market participants. Over the short run, it is possible to improve assets structure by amending regulations, but a developed financial market will be necessary over the medium- and long- term. Growth in standard of living and ongoing education of the public are very important for the normal functioning and operation of the system of voluntary private pension funds.

NATIONAL BANK OF SERBIA 21