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The importance of pension funds is increasing
submited on 21.08.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 21.08.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
Pension fund’s net assets increased by 46.7% in the year to June, as the trend is toward considerable growth acceleration in all three segments. The aggregated data from the Financial Supervision Commission show that pension savings expanded to BGN 1.85 billion in the first half-year, and the penetration ratio reached 3.5% of GDP. 50.6% are channeled to universal funds.
There are many factors contributing to the present acceleration of pension savings’ expansion. Among the most significant is the ongoing official employment growth – due not only to new working places, but also to reduction of shadow economy. This process leads to steady increase in the number of people, part of the pension insurance system. The total employment already exceeded 3.1 million people, and the number of the insured in private pension funds (in all three segments) reached 3.3 million.
The base, upon which pension contributions are being based also grew - recent NSI data showed 17.7% annual growth of average working wage in Q2 of 2007. These developments were combined with the increase of the size of the additional mandatory pension insurance contribution to 5% since the beginning of the year. At the same time, the funds were granted better opportunities to invest the accumulated financial resource. The restructuring of the investment portfolio is toward contraction of the government securities share and expansion of holdings in corporate securities and assets abroad, which combined with the stock price growth, gradually leads to realization of better return.
The rapid expansion of the private pension industry, which will most probably be kept in the medium term, has important macroeconomic effects. It might be expected that in the long term the expansion of the second and the third pillar will reduce to certain extent pressure, which unfavorable demographic processes will continue to impose on pension system and the first pillar in particular.
With the growth of private pension industry capitalization, its potential impact on the economy also increased. Pension funds are already among the most serious institutional investors, and their influence on the stock exchange market is now even more tangible. The relative size of the funds investments in shares in the total capitalization of the BSE grew fast – from 0.95% as of end 2005 to 2.45% in Q2 of 2007. At the same time, regardless of the considerable development, the Bulgarian capital market remained relatively shallow. This means that channeling substantial resource from the side of pension funds (and at the same time the fast developing segment of mutual funds) into the stock exchange stipulates for certain volatility of the indices. On the other hand, the role of the stock exchange as a source of financial resource for Bulgarian business. The importance of pension funds for corporate management improvement is also growing.
However, despite the improved investment regime for pension funds, real liberalization in the sector is yet to be achieved. Big challenges are related mainly to introduction of the multi-fund system (i.e. establishing different investment portfolios with different risk profile), as well as the opportunity to invest structured products, derivatives hedge funds gold and metals, etc. This would allow for pension funds to improve their diversification and portfolio management efficiency.
There are many factors contributing to the present acceleration of pension savings’ expansion. Among the most significant is the ongoing official employment growth – due not only to new working places, but also to reduction of shadow economy. This process leads to steady increase in the number of people, part of the pension insurance system. The total employment already exceeded 3.1 million people, and the number of the insured in private pension funds (in all three segments) reached 3.3 million.
The base, upon which pension contributions are being based also grew - recent NSI data showed 17.7% annual growth of average working wage in Q2 of 2007. These developments were combined with the increase of the size of the additional mandatory pension insurance contribution to 5% since the beginning of the year. At the same time, the funds were granted better opportunities to invest the accumulated financial resource. The restructuring of the investment portfolio is toward contraction of the government securities share and expansion of holdings in corporate securities and assets abroad, which combined with the stock price growth, gradually leads to realization of better return.
The rapid expansion of the private pension industry, which will most probably be kept in the medium term, has important macroeconomic effects. It might be expected that in the long term the expansion of the second and the third pillar will reduce to certain extent pressure, which unfavorable demographic processes will continue to impose on pension system and the first pillar in particular.
With the growth of private pension industry capitalization, its potential impact on the economy also increased. Pension funds are already among the most serious institutional investors, and their influence on the stock exchange market is now even more tangible. The relative size of the funds investments in shares in the total capitalization of the BSE grew fast – from 0.95% as of end 2005 to 2.45% in Q2 of 2007. At the same time, regardless of the considerable development, the Bulgarian capital market remained relatively shallow. This means that channeling substantial resource from the side of pension funds (and at the same time the fast developing segment of mutual funds) into the stock exchange stipulates for certain volatility of the indices. On the other hand, the role of the stock exchange as a source of financial resource for Bulgarian business. The importance of pension funds for corporate management improvement is also growing.
However, despite the improved investment regime for pension funds, real liberalization in the sector is yet to be achieved. Big challenges are related mainly to introduction of the multi-fund system (i.e. establishing different investment portfolios with different risk profile), as well as the opportunity to invest structured products, derivatives hedge funds gold and metals, etc. This would allow for pension funds to improve their diversification and portfolio management efficiency.
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