LFMI, in co-operation with the parliamentary Budget and Finance Committee, held a seminar "The Law on Pension Funds: Solutions and Alternatives," November 19 The seminar was designed to address the main problems and solutions regarding the draft law on pension funds and to review world-wide practices in establishing and regulating pension funds. The event was co-sponsored by the US Agency for International Development, the World Bank, and the United Nations Development Program. The seminar drew over 70 participants, including members of parliament, top government executives, pension and capital market specialists, and the media.
Ways to protect the interests of pension fund members were analysed by David Lindeman of the World Bank. Rafael Rofman, Head of the Economic Research Department of the Argentinean Pension Funds Supervision Institution, spoke about the origins of pension fund risks and risk management mechanisms. Finance Vice-Minister Laima Urbšienė presented the government's position on the law on pension funds. State policy in providing for fully-funded pension insurance was related by Prof. Kęstutis Glaveckas, Deputy Chairman of the parliamentary Budget and Finance Committee. LFMI's Social Policy Analyst Audronė Morkūnienė looked at major solutions and alternatives of pension fund models. Interaction between pension funds and assets management companies on the capital market was investigated by Bronius Žibaitis, Executive Director of the Assets Management Company of Vilnius Bank. The Free Market presents LFMI's President Elena Leontjeva's paper on the premises and effects of the arrival of pension funds in Lithuania.
Seminar participants concluded that the requirement for minimum investment returns stipulated in the pension fund bill will prevent the rise of pension funds in Lithuania and undermine the interests of pension fund participants.
According to the bill, every pension fund is required to secure for its members investment returns not lower than average interest on residents' bank deposits. If real income happens to be lower, a pension fund will cover the shortall from equity capital. If equity capital fails to meet the shortfall, the pension fund will be pronounced bankrupt. A single case like this would undermine confidence in capital markets and private fully funded insurance.
Minimum investment returns must be secured every year, a requirement that may prove hard to fulfil. Interest rates on government securities fluctuate mostly due to political and exchange rate risks, but they are expected to drop and become stable in the future. The value of shares on the capital market fluctuates, making it hard to secure investment returns on a yearly basis. Given that pension funds make long-term investment, fluctuations in the prices of securities tend to even out over time. Therefore the requirement to guarantee minimum profitability on a yearly basis is unjustifiable and inexpedient.
The draft law is intended to create a system of large, robust and reliable pension funds by placing on them strict capital requirements. Yet, this may inhibit the rise of many pension funds, thus failing to create conditions for extensive competition. It is anticipated that despite the growth of the capital market, pension fund members will receive levelled, close-to-minimum investment income.
This shows that instead of protecting the interests of pension fund participants, the requirement for minimum investment returns will have adverse effects.
If pension funds delegate the task of managing their assets to assets management companies, all pension fund liabilities to members will be shifted onto the asset management companies. These will be required to guarantee minimum profitability of pension programmes and to discharge other liabilities. The seminar concluded that such a model will not be viable as no prerequisites will exist for establishing and running assets management companies.
If assets management companies assume pension fund liabilities, they will be subject to the same equity, capital adequcy and reserve requirements as pension funds. But the same norms, and operational constraints for that matter, will be applicable to pension funds.
The purpose of delegating assets management to management companies is to enhance professional administration of pension fund resources. This approach is widely used around the world. Management companies may even be oriented to operating on one market or another. Under the conditions stipulated by the current pension fund bill, pension funds will not be interested in hiring management companies. These, in turn, will not be willing to conclude agreements required by the law. This will no doubt suppress the development of pension funds.
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