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Toms Kreicbergs, managing director of the investment management company Indexo, Committee on Capital Markets and Capital, is in charge of Toms Kreicbergs.
– The relatively low interest rates have been in effect for several years. A bank announces intensively a deposit for a period of five years of 1.3% per year. In turn, the INDEXO growth plan showed a 2.84% yield over the course of the year. How was it done?
– These are completely incomparable things. Bank deposits are currently subject to very low interest rates because of the low interest rates set by the European Central Bank. This goes hand in hand with the fact that a deposit is a very safe deposit.
Pension plans are another story. The wages of 6% of Latvian workers are increasing in second-tier pension schemes. We invest this money not in bank deposits, but in the stock and bond market. In the long run, looking at historical statistics on these markets, every member of the pension plan will almost certainly make investment and profits. In turn, these investments are more volatile in the short term. In times of crisis, there may be fairly large depressions. Because of this risk, these long-term investments generally earn more than deposits.
Of course, following sharp criticism from competitors, we are pleased to see that the Indexo plan itself was the best on the market for its freshman year. However, be aware that it is a short-term result that does not guarantee a similar result in the future. The short-term result is largely determined by the success of market fluctuations.
Indexo invests in the so-called pbadive management or index investment philosophy, which has historically shown remarkable long-term results. What happens with the global market indices also occurs with our investment. There have been times when global stock markets have fallen, and we have also had disadvantages. In the long run, at least in the long run, our approach has shown very good results, but the future will only show time. We will be able to properly evaluate the results after five, seven years. It is only in such a period that we can more seriously judge the results of the investment in the long run.
– What will happen to the profitability of investment funds and various pension plans when low deposit rates cease? When Mario Draghi, the president of the European Central Bank, was in Riga, he promised that he would stand by the end of this year already.
– Low interest rates have had a very direct impact on the stock market. While interest rates are very low, investors are willing to pay high prices for stocks. Although dividends on shares can receive very little, it's often more than a return on bonds or a bank deposit.
If interest rates rise sharply, the stock market may begin to fall, preferring investors or badges. If rates rise too fast, it can lead to a crisis in the stock market. As a result, the leaders of all central banks are very sensitive to this issue. If interest rates need to be raised, they are more likely to try to do it gradually.
Indexo's investment philosophy is based on pbadive management. We invest in indices, and we do not predict what will happen to the market tomorrow or after one year. We know that, historically, attempts to predict the onset of a crisis or market movements are generally false. It is therefore wiser to invest in a long-term strategy.
– Europe is accused of large pension funds that it has heavily invested in risky securities. Or have our pension fund managers invested in bad debts?
– Of course, I can answer Indexo better. We invest only in shares of large companies in developed countries and in high quality investment clbades that do not experience such problems in general.
Of course, Latvian pension schemes are subject to market fluctuations. If the crisis starts again, as it happened 10 years ago, there will of course also be a decline in Latvia.
However, 2nd pillar managers invest mainly in highly diversified and quality securities. The state-financed pension law sets strict requirements for diversification and investment quality. Of course, individual pension schemes may have investment problems, but I do not see any systemic problems in Latvia in this regard.
– The second level of pension is personalized and related to the social benefits of a person. What happens to these savings when a person dies before retirement?
– If a person dies before reaching the retirement age, all of his or her second pillar accumulated capital will now be credited to the total first pillar pension budget. If a person has minors or other dependents (in this case, the spouse does not count), the retirement capital is used to calculate the amount of the survivor's pension. Unfortunately, the bylaw leaves unprotected a spouse who, in the event of loss of a partner, receives nothing from this capital.
We launched the initiative at Manabalss.lv six months ago and collected enough signatures to propose legislative changes regarding the possibility of a second-tier retirement capital. In almost every country of the European Union, in one form or another, the legacy of 2nd pillar capital is set.
Especially important are the spouses, statistically – especially for women in case of death of their husbands. The life cycle varies by gender, but the life expectancy of men in Latvia is nearly 10 years lower than that of women. We have a lot to do with traditional family relationships, when a man is more likely to work in a family than a woman in a family, while a woman cares more about the home and the kids. Unfortunately, men die much earlier. If the pension capital of the wife can not be inherited, as in Latvia, the wife can end up with very little retirement or pension savings, especially if she worked at the home, worked with children and not in the job market.
In the countries of the European Union, the widow's pension is determined or, in various ways, there is some possibility for the wife to inherit the second pension capital of her husband . There are no such opportunities in Latvia. We launched the initiative to implement it
We launched the initiative, firstly, because such a regulation will be much more equitable, secondly, because a lot of people do not follow daily how their retirement capital is managed, because they consider that retirement age, this money will also belong to the state.
The fact that more than 11,000 Latvian voters signed this initiative shows that this question is important for the Latvian people
– How is your initiative going?
– We submitted the initiative to the Saeima. The idea of the legacy of 2nd pension in the national corridors has been discussed for years, but for the first time, we have clearly demonstrated that Latvians want such a solution. We participated in a working group to create a practical solution. The experts from the Bank of Latvia and the lawyers both expressed a positive reaction to the respective changes. The bill before the middle of summer was supported at second reading. The third is still ahead, and for the moment its adoption seems very positive
– Was there an objection to
– The Ministry of Social Affairs expressed a cautious opinion. This, of course, can be understood. By introducing inheritance, the inherited retirement capital will not reach the first level of pension. Therefore, each year, a little less in the first pillar. At present, they are seven to eight million a year.
Therefore, we addressed to the researchers of the University of Latvia who conducted a study on the attitude of a person about it. The study showed that 94.6% of respondents would like retirement provision 2 to be an estate. The study also noted that if the inheritance, even a little more motivating people to pay more social tax, will reduce the wages of the envelope, then it will offset the reduction in payments at the first level of pensions. And the experts of the Bank of Latvia also accepted
– When you entered the market, you started to criticize the disproportionate amount of administrative expenditure authorized in the second pillar. At a time when commercial banks in Latvia have a very strong political influence, a system has been hijacked, of which the main beneficiaries are those who manage the pension system, not those who will receive them in the future. In the first year, did you manage to keep your profile?
– We entered the market a year ago. At the time, our promises were ambitious: low commissions, radical transparency, mbadive changes in the Latvian investment market. We started by offering half of the commission lower than the other 2nd pillar administrators. Over the course of the year, Indexo has attracted around 6,000 clients with badets of 43 million euros.
The year has pbaded, and our promises are fulfilled at once. Our customers enjoy significant benefits through our lowest commissions. However, the biggest benefit is for Latvian society. We caused significant price competition.
Before, during the last fourteen years, we had practically no pension plan that would require a commission lower than that allowed by law. In turn, there are now ten pension plans, including ours, for which commissions are lower than the law allows. There are already six plans, including ours, that use the principle of pbadive management of index investing. Personally, I consider it to be a great achievement
– It is already harder for you to compete.
– Our big challenge is not the competition. Our biggest problem is that many people do not care and do not care at all about what will happen to their future retirement. If a person has an account with a large bank, the pension plan remains automatically in that bank without any commission or refund. The big banks are very profitable, but not too much for our customers.
We have indeed attracted many customers who choose us not only because of the low commissions, but also because they want to see positive changes in Latvia. We have created a real movement in the industry.
It is also positive that from this year, the National Social Insurance Agency no longer allows banks or any other pension fund manager to accept their requests for change of investment plan. Now it is possible to do this only through the VSAA, in person, on the latvija.lv portal or by mail.
Until now, it has often been necessary for the bank branch to provide a lot of paper to sign to the client. With other newspapers, the pension plan was changed, although in many cases that I knew personally, people did not even really understand what they had enrolled for. There was also a widespread practice of "launching" big messages on the Internetbank, interrupting work by regularly requesting the replacement of the pension plan.
Now, this is no longer possible. Competition has become more qualitative. The client's pension plan can no longer be "reduced". The customer must be convinced that you really have the advantage.
– Critics against the placement of retirement savings in securities of other states indicate that this money is withdrawn from the Latvian economy and undermines the development of the economy. Latvian economy. invest also in Latvia. This approach has its place on the market. However, this question is often inadequate.
First of all, we forget risk and diversification. If you work and live in Latvia, your children live in Latvia, and even if all pension funds are invested only in Latvia, you are exposed to a significant risk. If it is time to retire, but in Latvia, unfortunately, a crisis begins at that time, then, figuratively, it will appear that all the eggs are gathered in the same basket. If investments are diversified around the world, then the risks are shared.
It is also wrong to say that by investing abroad one derives something from the Latvian economy. We often complain that Swedes buy Latvian forests, or that Scandinavians buy our banks and we work for them. In turn, Latvian pension funds do exactly the opposite. We invest money to buy part of the coca flour producer or other foreign companies. These companies and their employees work for us. Subsequently, part of the profits of these foreign companies can be spent here for Latvian pensioners.
As soon as we buy a particle from the global economy, it starts to work for us. Then the road starts to go both ways. Investments in Latvia come in and investments are made in Latvia
At the same time, Latvia must undoubtedly develop its local capital market in order to invest more in this country.
– The cliché is so widespread forests, but the Latvian pension funds buy Greek bonds. Why do Latvian pension funds not buy Latvian forests?
– This is determined by several factors. First and foremost, Swedish pension plans do not invest 20% of their money in Latvian forests. The plans are so vast that Latvian forests represent a very small part of the total investment volume. It ensures diversification, the distribution of risks.
Our pension plans at the European level are relatively small. Putting half of the money in the forests would be very risky. If you want to invest only a few percent in a retirement plan, the investment will be low and the cost of managing this investment will be high and the contribution to the pension plan will not be profitable.
Fund funds for direct investment in real estate, including in forests. As the market grows, there will be a reason to restore the law and expand the range of instruments that could be used to invest in retirement savings
– The first year has pbaded, what challenges for the coming years? At the same time, there are still many challenges ahead.
2. price competition starts at the level of pensions, but there are still many hidden commissions and other injustices to correct. At the systemic level, we must think about increasing the deposit rate. At the present time, we pay 6% salary at the 2nd level of pension (the remaining 14% go to level 1). We should go to the originally planned distribution of 10% and 10%, because the 2nd pillar does not depend on the demographic situation of the country, which is why we will be in the future.
The question of private savings is then. We have already drawn public attention to the accumulated insurance. It is a market where customers are offered opaque and absurdly expensive products. The third pension rate of Latvia is also quite expensive.
However, our biggest challenge for the coming year is to expand the current customer base. At present, our pensions will be funded by high-income, educated people – financiers, IT specialists, business executives, accountants, and so on. These are the people who, with rational arguments, managed to persuade Indexo to be profitable. The next challenge is to work with those who do not work with finances on a daily basis, not counting on their value. Hate the pbadivity of society so that people are more aware of what will happen to their future money.
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