Pension funds in lucrative business

Tõnis Oja
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Illustration: graafika: Alari Paluots

Last year, all asset managers involved in pension funds business earned profits, including LHV Varahaldus and Nordea Pension Funds – up to now in the red.

A month ago, Äripäev published list of Estonia’s leading wage payers, topped, among others, by two fund managers. Estonia’s fourth largest salaries are paid by Danske Capital – 2011 monthly average being €4,440. Last year’s monthly average grew by 5 per cent to €4,668. And, considering that the board members’ wages shrank a bit, the so called rank and file had, obviously, a slightly stronger wage rise.

11th best wages in Estonia, in 2011, were paid by SEB Asset Management (Varahaldus) with €3,951 per employee. By last year, their average salaries rose by 9 nine per cent to €4,297.

It feels like even this year asset managers, economists and experts of the said funds may ask for added pay, as last year’s results were not bad at all.

In 2012, revenues of six largest asset managers, who, among other things, watch over pension funds, grew by four per cent to €30m, profits almost doubling to €8.7m. The growth mainly came thanks to LHV and Nordea – in the black for the first time ever. In 2012, LHV Varahaldus made €124,000 and Nordea Pensions Estonia €316,000 of profits – contrasting with losses of €1.1m and €0.66m, respectively, in 2011.

According to data of Financial Supervision Authority, as at end of last year, investment and pension funds held €2.09bn worth of assets, mandatory i.e. second pillar pension funds making up €1.5bn of that. The second pillar funds being the only funds with increasing assets, leading to an awkward conclusion: the funds business is a foolproof business, indeed – volumes of investments, and thereby also increase of fund managers’ income, guaranteed by law. All you have to do is keep expenses in check – and profits are guaranteed.

True: mandatory pension funds, in that sense, are not the only ones – motor third party liability insurance also guaranteed income... not increase thereof, however.

With the above claim, fund managers do not agree.

«The money coming into second pillar increases the savings meant for people’s pensions – payments enter pension funds, the assets of which belong to clients. The responsibility of fund managers to keep and to invest the said assets is great, to say the least,» said the LHV Varahaldus CEO Mihkel Oja. «Which words one uses to describe such activities, that’s a matter of taste,» he added.

«If it were foolproof, overly simple and profitable, the market would abound with adventurers. Both local and foreign,» thinks SEB Varahaldus board member Sven Kunsing. «I do not remember anybody except Nordea having entered, since the system was launched. Rather, one left.»

«Fund management is not risk free, definitely not. On the business side of it, these past years, fund management has encountered quite a strong competition – three times a year, pension collectors may change funds; the volumes of some funds substantially altered by this. Therefore, increase of funds and the profitability of managers thereof is not guaranteed,» said Alo Alunurm, chief executive of ERGO Funds.

Angelika Tagel, head of Nordea Pensions Estonia, said that the expenses of their business increase as the pension funds themselves increase, while management fee rates decrease pursuant to law. In the light of this, large groups have better possibilities to earn income on equity capital.

«Surely, market bounce-back and continued payments into second pension pillar benefit both client and fund managers,» underlined Ms Tagel.