SURVEY: EUR 2 bln unutilised in Cyprus pension funds

Nearly two billion euros are sitting in accounts held by the employee provident and pension funds with less than a tenth of that figure managed to yield anything more than the ultraconservative returns of cash in the bank and government bonds.

As speakers at a recent seminar on provident and pension funds told a crowd of 100 potential managers or administrators, these funds will only be able to provide healthy returns to their members if they improve codes of practice and governance, as well as by introducing sound investment policies.

Such an investment policy should be designed to suit the needs of each pension fund and satisfy the obligations as well as the wishes of the management committees in relation to the investment risk that each fund is exposed to.

The recent case of the troubled EAC pension fund that is still struggling to recover the millions wiped out from its portfolio through the dealings of Yiannos Andronikou and his investment management company, Suphire, is one of the reasons why pension fund committee are hesitant to make any medium-risk investment, let alone high-risk.

The seminar, organized by KPMG’s Financial Advisory Services and Hewitt Associates (Cyprus), a leading consultancy in retirement and financial management and other human resources solutions, aimed to pinpoint the needs of the local provident and pension funds and provide ways how best to manage these funds and their obligations.

Cyprus passed into law the European Directive 2003/41/EK that lays down strict ground rules for pension funds and increases the responsibilities of the funds’ management committees.

Philippos Mannaris, Director Hewitt Associates (Cyprus), said that the biggest problem facing the development of pension funds in Cyprus had been the insufficient old law and the implementation of the new law.

“People must understand that pension funds are the only hope that many workers have nowadays,” he said, adding that some of the best or richest funds were the ones that have been active for many years or that have employed modern management techniques.

“Pension funds must realise that they have obligations piling up which some of them will not be able to meet, unless they reform and restructure,” Mannaris said.

Marinos Gialeli, Managing Director of the hotel employees’ union pension fund, considered by many as the most progressive and well-managed fund in Cyprus, gave a case study example of his own union’s efforts that presently employs six people to administrate the pension and provident funds alone.

 

— Cyprus pension fund law passed

 

The House of Representatives approved the Draft Law regarding the establishment, operation and supervision of Pension Funds last November.

Under the new Law, pension funds are subject to investment rules and regulations requiring them to seek professional investment advice, and additionally to substantially diversify their asset classes by including financial instruments listed on regulated stock markets.

The new law brings Cyprus closer to meeting EU directives, as it had not incorporated the EU’s Pension Funds Directive that has been in force since September 2005.

The introduction of this new law will drive private pension funds to seek professional investment advice and make use of recognised investments at home or in foreign exchanges, thus the flow of funds from the pension funds into local equities will also increase.

“At present the biggest part of these funds are in term and fixed deposits with banks and cooperative institutions,” said Christos Vasiliou, a KPMG partner in the Financial Advisory Services.

 

— CYTA, EAC and Hotel Employees the largest

 

With the state-owned Social Security Fund seen running into deficit unless dramatic changes to its composition and level of contributions are made, coupled with suggestions to increase the retirement age from 60 to 63 while actuaries are calling for the limit to be increased to 65 years of age, there is a lot of anxiety among the population regarding their pensions.

There are also the privately run pension funds, most of them happy until now to place the funds in deposit with banks and earn a decent interest. That has changed following the reduction in interest rates, and in the case of Cyprus pound deposits, the imposition of the defence levy on interest income earned, further reducing the return of such assets.

There are around 1,850 pensions in Cyprus both DC (Define Contribution) and DB (Define Benefit), but only 120 with more than 100 members. All of the pensions have their own management committees running the funds and responsible for the investments with some having permanent staff for the daily operations.

There are some government pension funds based on DB and the rest are industries pension funds and private companies pension funds both based on DC.

In terms of value, the biggest in size is the Cyprus Telecommunication Pension Fund (DB) with EUR 550 mln, followed in second place by the Cyprus Electricity Pension Fund (DB) with EUR430 mln and in third place is the Hotel Employees Provident Fund (DC) with EUR 240 mln.

Although the Hotel Employees fund may be the third biggest in terms of assets, it is the first in terms of number of members, with current membership at 14.800 and 200 hotels participating.

Gialeli told the Financial Mirror last year that after delivering annual growth of an average of 6-7%, it was decided to reduce the high allocation to bank deposits, which on average at Cyprus pension funds exceeds 85%.

“Our new investment strategy is to invest 55% in bonds and cash of which 10% will be in global bonds, 15% to invest in equities of which 10% will be beyond Cyprus and Greece, 15% in real estate and hedge and another 15% loans to members,” he said, adding that, “our goal is to maintain a total return of 6.5% with 3.5% volatility per year.”

 

–– How to lose millions

 

Dr. Jim Leontiades of the Cyprus International Institute of Management wrote in a recent article that the “crash” of 1999/2000 has been followed by a period of risk avoidance in which many investors have stopped investing in equities altogether. This is an extreme reaction which has very likely harmed investor returns, particularly as regards investments carried out by pension/provident funds.

While individual investors have the right to put their investment funds wherever they like, avoiding all risk associated with equities, it is not quite the same thing for funds entrusted with investing other people’s money, Leontiades said.

“Pension / provident funds have a duty to invest the money entrusted to them in a way which will earn the maximum return associated with a low level of risk,” he said, adding that “they have a duty to balance risk and return. Not getting the right balance can be very costly.”

The key to managing investments consistent with an acceptable level of risk is diversification, Leontiades wrote.

“Provident funds investing in equities are no longer limited to investing only in the relatively few large companies listed in Greece and Cyprus.

“However, balancing risk and return within a portfolio invested in hundreds of companies located in many different countries requires new tools and techniques. Until recently, these have not been widely known here for the simple reason that, with the former restrictions on foreign investment, they were not needed. This is no longer the case.

“It is not enough for someone entrusted with the large sums of money at stake to be merely a passive onlooker. The consultant can make suggestions but the ultimate responsibility lies with the fund managers and its board members. They should know enough about the new methods to understand what the consultant is doing and to ask the right questions.”