The challenges of war and necessary solutions for pensions in Ukraine were discussed in a column by Tetiana Salnikova, the director of the All-Ukrainian Pension Funds Administrator. The column was published on a Polish portal, which is the only official source of information on the pension savings system for workers in Poland (Pracownicze Plany Kapitałowe). You can read it in Polish here.

We are providing the English version.

Challenges of War and Necessary Solutions for Pensions in Ukraine

Prior to the large-scale invasion by the Russian Federation, Ukraine understood that due to demographic changes, solidarity pensions alone do not provide a decent life for elderly Ukrainians. Currently, we have 10 million contributors to social contributions and 10 million pensioners. Under these conditions, pensions are low. More than 5 million people receive pensions below 100 euros. Even for such pensions, social contributions are insufficient, and the state additionally allocates approximately 5 billion euros per year from the state budget for them.

The large-scale war has exacerbated demographic challenges. About 5 million people are forced to seek refuge from the hostilities in other countries. Due to the military actions, mortality has increased. Economic challenges have been added to demographic challenges: one-third of those who had jobs in February 2022 lost them. Half of the working population experienced a decrease in income.

To change the pension situation, Ukraine plans to introduce mandatory pension savings and develop voluntary ones. Currently, pension savings involve just under 900,000 Ukrainians with a total amount of only 100 million euros. This constitutes 0.1% of the country’s GDP. Ukraine ranks last out of 88 countries surveyed by the OECD in this regard.

After the planned pension reform, pension savings will involve 8 million Ukrainians, and within the first 5 years, it will be no less than 5 billion euros.

Currently, there are 58 private pension funds operating in Ukraine. Since the beginning of their operation in 2005, approximately 90% of contributions were made by employers for the benefit of their employees, in addition to their salaries. Currently, around 2,000 enterprises in Ukraine take care of the future of their employees in this way. For a long time, individual contributions were insignificant, but the war has changed us. We felt responsible for our future and the future of our country: over the past year, the volume of contributions from individuals is only one-fifth less than the volume of contributions from enterprises.

Ukraine introduced the pension savings system relatively late in the region. Therefore, it had the opportunity to incorporate all the safeguards against fraud, abuses, and vulnerabilities that other countries had developed over decades of trial and error. In practice, the system has proven its resilience, preserving people’s savings during the financial crisis of 2008, the beginning of the war in 2014, and now, during the large-scale invasion, without ceasing pension payments for a single day. Despite its positive results, it has not gained widespread acceptance due to the state’s long neglect of pension savings development, politicians’ reluctance to take responsibility for a complex reform with each new wave, and the traditional mistrust of Ukrainians towards financial institutions, provoked by the misappropriation of their funds by Soviet elites during the collapse of the USSR from the Soviet Savings Bank and scammers in the 90s.

To build a sustainable future for the country in the face of rapid aging and the challenges of war, it is crucial to maximize the inclusion of people in pension savings. For individuals, these savings will serve as an additional source of income during retirement. A solely solidarity-based pension will not be able to ensure a replacement ratio of more than 20%, but together with a savings-based pension, a person’s income in retirement will constitute at least 40% of their salary. For the country, an internal long-term investor will emerge, whose funds will aid post-war recovery and business development, wage de-shadowing, and capital market growth. If Ukraine invests in its own recovery using its own resources (pension savings), it can attract more foreign direct investment into such projects. This is always a risk-reduction factor for investors.

To fundamentally change the pension future for Ukrainians, it is necessary to implement a mandatory pension savings system, transition all types of preferential pensions to an accumulation principle (for workers in heavy and harmful industries, judges, etc.), and more. It is crucial to significantly develop voluntary pension savings now, without waiting for the end of hostilities, within the framework of existing legislation. In this context, the state must demonstrate leadership and set an example, while businesses and communities should seize the opportunities for development offered by this system.

The state can:

1. Coordinate the reform of corporate governance in state-owned enterprises and the development of pension savings: implement accumulation pensions for employees of state enterprises as an owner and employer.
2. Introduce pension savings for workers in socially important professions (possibly with the involvement of donor funds) who have taken on the main burden of social problems caused by the war and whose presence is critically important for the return of Ukrainian migrants. This includes medical professionals, teachers, social workers, rescuers, firefighters, police officers, and, of course, military personnel.
3. Allow pension contributions to be made for the benefit of Ukrainians not only by individuals, employers, and close relatives but also by charitable and civic organizations. This will help cover the most vulnerable categories of people with pension savings, including those most affected by the war, without spending a penny from state or local budgets.

Communities can:

1. Provide additional accumulation pensions to employees whose salaries are funded from local budgets, have significant social importance for the community, and need additional motivation to stay in the community—such as educators, social workers, and others, depending on the needs of each specific region.
2. Attract long-term capital for recovery and development from pension funds through municipal bonds and other instruments provided by legislation. Even during martial law, such bonds are in demand among pension funds.
3. Create their own pension fund, involve municipal enterprises and socially responsible private companies in the region in its participation, and subsequently attract a portion of the mandatory pension contributions of community residents. This will accumulate significant investment resources and participate in joint investment projects with foreign investors, businesses, and the Government of Ukraine.

Businesses can:

1. Attract top talent and reduce staff turnover by implementing pension savings for employees with tax savings of up to 50%, using tax incentives already provided by Ukrainian legislation.
2. Attract long-term capital for their own development from pension funds through corporate bonds.
3. Create their own pension fund, attract voluntary and, subsequently, a portion of mandatory pension contributions, and participate in joint investment projects with foreign investors, communities, and the Government of Ukraine.

Pension savings are precisely the area that provides a win-win result: critically important social impact and the resilience and development of businesses, communities, and the state. That’s why Ukraine should maximize all opportunities in this area.

Two non-state pension funds, the assets of which are managed by AMC “Vsesvit”, NPF “VSI” and NPF “Pokrova” took the first places in terms of profitability (indicator of growth of the net value of a unit of pension assets) for June among 56 non-state pension funds as of 06/30/2023. according to the Ukrainian Association of Investment Business.

In particular, the net profitability for people after deducting all costs amounted to +3.59% for the NPF “ALL” and +1.38% for the NPF “POKROVA” in June.

According to UAIB data, the total net asset value (NAV) of non-state pension funds as of June 30, 2023 was UAH 2,542.87 million. The growth of PFA for the month amounted to UAH 26.23 million, which indicates the revival of the NPF market, the resumption of contributions by depositors to their own benefit, as well as the resumption of contributions by companies to the benefit of their employees.

Yaroslav Savchenko, director of AMC Vsesvit comments: “The significant increase in the value of assets of funds under the management of AMC Vsesvit took place due to the increase in the price of Eurobonds and GDP-warrants of Ukraine, which are included in the assets of the funds.

Also, the dynamics of the value of shares of foreign issuers was extremely positive. The value of share portfolios in the assets of pension funds under our management increased by an average of +5.4% in June.

Of course, the profitability for one month is not indicative, but the funds under our management consistently demonstrate high results and exceptional resilience during crises. And the results of June show that broad diversification of assets ensures the availability of “growth reserves”, which during the improvement of the situation, when investors’ sentiments change, give a higher return than purely fixed-income instruments. We include such reserves in the portfolios of pension funds, ensuring their widest possible diversification, even now, when opportunities for investing pension assets in Ukraine are extremely limited.

World experience shows that this is the best way to protect funds if you want to keep them for a long time.”

For reference: Data on fund profitability are taken from the monthly reviews of non-state pension fund activities of the Ukrainian Association of Investment Business.

All four non-state pension funds, the assets of which are managed by AMC Vsesvit, were included in the TOP-10 non-state pension funds in terms of profitability over the last 12 months (from April 2022 to April 2023), according to the data of the Ukrainian Investment Business Association. In particular, these are VSI NPF, Pokrova NPF, Garant Pension NPF and Social Support NPF, which earned for their members from 12.13% to 18.40% during this period (this is a net return, already net of expenses).

Yaroslav Savchenko, director of AMC “Vsesvit” comments: “Of course, we are pleased that during the last difficult 12 months, we helped the funds under our management, despite all the difficulties, to show such results in terms of profitability. However, the main task for us during a large-scale war was and still is to preserve people’s pension savings.

At the end of 2021, among the scenarios we analyzed while forming the investment strategy for the funds for 2022 was the invasion scenario. That’s why we’ve offered pension fund boards strategies that minimize risk rather than maximize returns. That is, such a set of tools that most protects the accumulation of people in cases of crisis development, and not the one that gives the highest profitability in favorable scenarios.

Of course, we hoped that the worst scenario would not come true. However, it happened. We coped with the task of protecting pension savings. We also support the country on the way to Victory by investing pension savings in government bonds, including military ones.

At the same time, the strategies proposed by us have “growth reserves” – that is, investments in such instruments, which after the Victory will bring a much higher yield from the growth of their value, than instruments with a fixed yield.

And, of course, we continue to look for opportunities for the widest possible diversification of the portfolio of pension funds, even in the current realities, when the list of investment opportunities is extremely limited. After all, “spreading across different baskets” is the most effective way to protect funds over long periods of time.”

For reference: Data on fund profitability are taken from the monthly reviews of non-state pension fund activities of the Ukrainian Association of Investment Business. The ranking does not include funds that, for one reason or another, did not provide the data necessary to calculate the change in the net value of a unit of pension assets for a year (the last 12 months).

The average yield of Open-ended fund «VSE» for the 3 years (increase of the net value of the certificate) amounted to 26.04% annual

Net value of the certificate, calculated on the net asset value on 31.12.2016  is 1 255.10 UAH

AMC “Vseswit” in time formed an anti-crisis investment portfolio structure of the fund. Over the past three years (2014-2016), from the beginning of the crisis period in Ukraine the yield was 78.11%. Well-formed investment strategy and currency diversification in 2016, allows protect assets against possible future financial risks and provides all the prerequisites for further growth.

The yield of 2016 amounted 15.70%. As 31.12.2016 assets of Open-ended fund «VSE» amounted to 1 million 534 thousands UAH.

As 31.12.2016 placed 1 219 investment certificates.

Assets structure:

The fund’s assets are diversified by 17 investment baskets. The share of assets in the US dollar in the fund’s portfolio is 83.23%

Regional structure:

Sectoral structure:

Everybody who wishes to purchase investment certificates can do so by contacting the office of AMC «Vseswit».

For more information, please call: (044) 207-02-94, or visit site of AMC «Vseswit» www.vseswit.com.ua

Consulting line of international investment group «VSE»: 0-800-501-925

Reference:  

Asset management company «Vseswit» was founded in 2004 and is part of an international investment group «VSE».

Today AMC «Vseswit» operates more than 250 mln. UAH., including the assets of one of the leading Open pension fund «VSE» which was registered among the first in 2004 and received the first pension contribution in early 2005 , private pension fund of the Ukrainian Greek Catholic Church «Pokrova» Open-ended Fund «VSE», three closed-end investment fund «Amalthea», «Callisto» and «Evante» through which are implemented direct investments in commercial real estate, telecommunications and medical industry.

AMC «Vseswit» is a member of the European Business Association (EBA), the American Chamber of Commerce (ACC), Ukrainian Association of Investment Business, and collaborates with the Ukrainian Association of Pension Funds Administrators.