50 funds, 900,000 participants and billions of investment income: results of 20 years of NPF operation

The system of non-state pension funds (NPFs) has been operating in Ukraine for two decades. Today, there are 50 funds operating in this market, where about 900,000 Ukrainians are saving for their future pensions. During this time, they have accumulated almost UAH 3.5 billion in contributions and paid out more than UAH 2 billion. The system generated about UAH 5.5 billion in investment income alone.

This was discussed during the roundtable "20 Years of Non-State Pension Provision in Ukraine", which brought together representatives of funds, specialized associations and the regulator. The participants summarized the development of the system and discussed the possibilities of its integration into the country's economy.

LIGA.net has identified seven main points from the discussion and describes them below.

NPF market: 50 funds and 900 thousand participants

Non-governmental funds have become an important instrument of additional pension provision for hundreds of thousands of Ukrainians. According to Tetyana Salnykova, chairman of the board of the Ukrainian Association of Pension Fund Administrators, the system has already proven its worth.

"There are 50 non-state pension funds in Ukraine, with about 900,000 people saving for retirement. Over 20 years, they have made almost UAH 3.5 billion in pension contributions. During this period, UAH 2 billion of pensions have already been paid out," she noted.

Salnykova added that during this period, the funds received almost UAH 5.5 billion in investment income.

Returns on private funds exceed inflation

A number of funds demonstrate returns that are significantly higher than inflation. According to Hryhoriy Ovcharenko, Chairman of the Board of the All-Ukrainian Association of NPFs, the most successful market players outperform not only inflation but also currency risks.

"Four out of the five largest funds in Ukraine have successfully outperformed inflation, devaluation, foreign currency appreciation and deposit rates," he said, citing the examples of Dynasty, Enerit-Ukraine, PrivatFund and OTP Pension.

The growing role of individuals in savings

Previously, employers' contributions formed the basis of savings, but now the situation has changed. According to Tatyana Salnikova, for the second year in a row, individuals have been contributing more money than companies to employees' accounts.

"While at the beginning of the pension funds' operation 97% of contributions were made by employers in favor of employees, for the second year in a row, contributions from individuals have exceeded contributions from employers," she said.

Shares of state-owned companies may come to the market

The regulator is considering expanding its tools for investors. Chairman of the NSSMC Ruslan Magomedov reportedthe idea of putting some shares of large state-owned companies on the stock exchange is being discussed.

"We have an initiative, which is not yet actively advertised, to take some of the profitable state-owned companies that pay dividends and sell their shares in free float. We are planning to take about 7% of companies, and it will be something recognizable – state-owned banks or energy sector companies," Magomedov said.

Possible candidates include PrivatBank, Naftogaz of Ukraine, and Energoatom.

He added that this would be the first step towards creating a market segment where businesses would see that the mechanism really works: by issuing an instrument, such as shares or corporate bonds, you can raise a certain amount of money.

Younger people are increasingly interested in pension funds

Non-state pension funds are increasingly attracting young people. Whereas previously a typical participant was a client over 40, the average age is now gradually decreasing to 40. According to Natalia Mezhenska, CEO of OTP Capital, an asset management company, and chairman of the board of OTP Pension and Free-Flight NPF, more and more Ukrainians are starting to think about the future in their 20s and 30s.

"The people who come to us through our website are 37 years old on average. Young people in their 20s and 30s have appeared among our clients. Five years ago, it was the exception rather than the rule to see such a person among our pension funds. Now they make up 15% of all our clients," she said.

Private pension funds should provide quality of life, not just benefits

The main value of the pension system lies not only in financial payments, but in creating conditions for a decent life for the elderly. This was stated by Oleksandr Indilo, Deputy Director General of the Social Insurance and Pension Development Directorate of the Ministry of Social Policy.

According to him, World Bank research shows that more than 80% of elderly people need services, not money, such as medical care, social support, and opportunities for communication. "People need support, help in old age," he emphasized.

In his opinion, it is private pension funds that should become the center of such an ecosystem that combines financial resources with a package of services: medical, household, and social.

"These are medical services, housing and communal services, and certain recreational or socialization services, supporting people's emotional state," he explained.

He also noted that globally, private pension funds offer a "one-stop shop" for access to various services, from discounts on medicines and medical check-ups to travel arrangements and socialization programs.

This is the key model that we need to lay down in the development of private pension provision, Indilo summarized.

Pension funds should work in the economy

The new accumulation system cannot be limited to investing in government bonds. In his opinion, pension funds should support the development of the real sector. This was stated by Ruslan Magomedov.

He added that the pay-as-you-go system is not sustainable. Even if we have a funded system tomorrow, the question remains, where will we invest these funds? If in government bonds, the burden will not decrease, but will even increase by the amount of the coupon to be paid for these bonds

"Of course, we will start with domestic government bonds in any case. But the time they will be available is just a short window in which we have to create something else so that the money from the funded pension system goes to the real sector of our country's economy," he emphasized.

In this case, we will be able to create something better than our Polish colleagues, whom we have been looking up to for many years, Magamedov summarized.