The crisis pushed our money into bank deposits

Mrs. Petkova, all voluntary pension funds keep on realizing negative Rate of return. Is that alarming?

As a result of the global-scale crisis all investors realize return far below the intended levels. The situation on the Bulgarian Stock Exchange is quite hard. That part of the portfolios of the pension funds, which is invested in shares of Bulgarian companies cannot help but give negative results. And that is so not only in the recent weeks but still from the beginning of 2008.

The good news is that pension funds are really long-term investors. That is why I do not regard what's happening in the last eight months as quite troublesome. I think there is enough time to compensate the present results. Our fund members, who have been insured for a long time, do not practically suffer real losses. Just the level of the positive Rate of return that we have realized in their favor in past periods has slightly dropped. And also, when we analyze Rate of return, it is better to take into consideration some longer period. For a 24 and 36-month period, for instance, in spite of all problems the funds have realized positive results.

I do not mean that I am not worried by the problem. And it's not so much the momentary results but rather the certain insecurity we started to feel. From the beginning of the year the problem about when that crisis would end and particularly whether the situation on the Bulgarian Stock Exchange would start stabilizing is a matter of a very serious analysis.

And what does the analysis show?

I should admit that in the first months of the year when the most serious share price corrections happened on the Bulgarian Stock Exchange we expected that the situation will stabilize within the first half-year or a couple of months later. Just several days ago however we were again very unpleasantly surprised by a quite serious daily correction on the stock exchange. That is why we are more inclined to think that what we would all like to happen would not happen so soon. The stock exchange turnover is unusually low; it reduced to BGN 1 to 2 million per day. That is not a sufficient premise for the restoration of the levels of shares since the market value of securities, the structure of which in principle requires a very high price, may suddenly drop by 10 percent just because someone has decided to sell five of them. That is extremely unreal. Actually, the same as last year when we accrued very high Rate of return and in a certain moment we had to go out and say publicly to our clients: "Don't be so glad, that is just a book Rate of return." Now we say "Don't worry, that is just a book Rate of return"

Unfortunately, even the international crisis that affects the stock exchange outside Bulgaria does not help for the renewal of foreign investors' interest in entering our capital market. That additionally aggravates the situation. Besides, the inflation rate is quite high...I can say for certain however that even if the crisis continues for two years our clients would have nothing to be afraid of. I have many times said that within the long period of pension insurance you certainly pass through several peaks followed by sharp declines. The important thing is to achieve good results in the long run.

Didyoureorienttheassetsofthemanagedfundsto more secure investment instruments?

We, and I suppose all colleagues from the other pension funds, make serious consultations how to protect to an even better extent the interests of the insured people and to realize a better return. We couldn't but direct some more assets to the money market. Just several years ago we did not like at all that instrument since it brought lower return than the investments in the capital market. Now however all of us quite quickly turned to it. The new receipts from contributions go mainly to savings accounts in credit institutions. I haven't seen soon statements of the other pension funds but I suppose that all have already reached the upper limits for investments in bank deposits. Of course, due to the serious limits imposed by law we cannot use them to fully compensate the negative results brought by some other instruments. But there are still other variants we are presently discussing.

From the beginning of the year the rate of the return we have achieved is far better than the correction of the Bulgarian Stock Exchange. The reason is that from all assets under our management only 10-12 percent are invested on the Bulgarian Stock Exchange and only those do not bring real Rate of return; while all other assets, though sometimes with inconstant success, bring positive return. That's the good news.

What I can say especially about Doverie and the pension funds under our management is that from the beginning of the crisis we have evidence of how important is the good diversification of the portfolio. We have quite a lot of assets invested abroad. Irrespective of the international crisis in quite some days we get positive results just from investing in various instruments and in different markets. That helps us compensate the losses.

Doyouthinkthepresentcrisissituationsuitableforthe introduction of the multifunds in the pension system?

There are two radically different opinions on this question. The first, with which I definitely disagree, is that the present moment is extremely suitable for that. I understand the reasons of the colleagues supporting that opinion. At present we are at a kind of a bottom regarding investment and return. It is always well to enter the market when things are closest to the lowest point. In that sense may be multifunds will turn out to be attractive. But just for that reason. Such motive is good only for speculative players, which in my view is in contradiction with the very foundations of pension insurance; its purpose is receiving decent income after retirement and not realization of quick profits. Just on that reason we carry on long discussions on how exactly should those multifunds be introduced, not to follow the model of the existing mutual funds but to extend pension insurance.

Lead by this understanding, I think that the present moment is not suitable for their start. What bothers me is that the social insurance culture of our clients is not enough high. So it is quite possible for a person mislead by the idea that those are pension funds and by the desire to "play" with the Rate of return to find himself being a client of a risky portfolio without having understood what exactly he was doing. At the same time we are not sure whether the situation won't aggravate further and whether the market won't go any lower, i.e. whether it is not likely to realize losses from the very beginning. Our constant strive has been to show people how important is for them to be members of the pension funds. It seems to me that no matter what number of people could be unconsciously mislead and their assets in the chosen multifund possibly lessen, that may become a matter of public discussion and may arouse problems with the other clients too.

Multifunds are surely a big challenge for the companies, at least for the investments which require serious expenses. At the same time FSC proposes a gradual fee reduction. Is it the proper time for that? Won't that affect the revenues of the pension funds?

I personally believe that the multifunds are an extremely good idea but like every good idea their successful realization needs enough time for preparation. We are ready to make that preparation as well as the necessary expenses. Here however arises the question about the income of the pension insurance companies the only source of which is the fees.

In my opinion they need a very serious discussion not only in connection with the multifunds but also with many other payments we are obliged to make by law. The issue became topical after the last proposal of the Financial Supervision Commission for the reduction of the investment fee. That is quite an extreme step even though it will be made gradually and with a 4-year horizon.

This question is a matter of principle. Should the state, by a law, interfere through the supervisory body in determining the prices of services offered in a country based on market economy? Here we have a very serious example why in the presence of free competition between the providers that is not necessary. In accordance with the regulations the maximum management fee that may be charged on the voluntary pension insurance contributions is 7 per cent. There is no company however to charge the maximum rate. Just the opposite, there are companies that have fixed it to 1 per cent. Obviously the market has played its role and the fee has reduced. The same will happen for sure with mandatory pension insurance, the history of which is not as long as that of voluntary insurance. Why should the state then take the place of the natural market mechanisms?

Our second fundamental problem concerning the Commission's proposal is connected exactly with the investment fee. At present its rate is 1 per cent of the assets under management. Without having any objections against the limitations imposed to the companies in connection with the investment of the assets, which is something normal, I would like to remind that they are a complicating factor for their management. Besides, we are required to develop a system to daily observe the limits, assess the units, report every transaction to the Financial Supervision Commission and send information to BNB. These are additional expenses and huge work to be done the like of which the other companies engaged in active investment management have not. Yet, some of them charge fees of 2-3 per cent. Why should just the pension companies be obliged by law to reduce a market established price?!

Last but not least, If the Commission is so interested in reducing the fees and so impatient to wait for the market itself to do that, why don't they suggest reduction of the management fee? Not that I would support such an idea but yet this is something quite specific and has various reflections with the pension funds. Honestly said the only answer that now comes to my mind is that the lack of such a proposal is a kind of protection of the new and smaller funds that have still not accrued enough assets to realize income from that fee.

One more question concerning the amendments to the Social Insurance Code and particularly the liberalization of the procedures of switching participation from one pension fund to another. Do you think that would help raising the number of transfers "under pressure" on the part of employers or pension insurance companies?

Of course it will. In my opinion, that liberalization will be very useful for the people. Before that however, the ordinance regulating the transfer procedure must be radically changed. It is my contention that presently it creates conditions for violations, enables falsification of applications and signatures, and allows pressure by employers and clients to be misled. Should the regulations be changed let people have the right to switch participation even every day.