So that old age can be a joy! Present and future of funded pension  reform in Armenia

ArmInfo. Imagine for a moment that you are a beneficiary of the of the USA represented by Apple, Microsoft, META, NVIDIA, TESLA, Alphabet Inc.  and Amazon. And this became possible by joining the Mandatory Funded  Pension System (MFPS)  of Armenia.  

Saving money wisely for old age, investing it in international assets in order to maintain a relatively high standard of living - this is the goal of the funded  pension system operating in the country. In any case, this is what  pension asset managers assure citizens of Armenia. ArmInfo  correspondent spoke with experts and managers of mandatory pension  funds (MPF) about the 10-year period of the formation of the MFPS and  how realistic it is to retire with money in Armenia.

Our path was difficult and thorny...

This year marks exactly 10 years since the introduction of the MFPS.  Like any reform, the pension reform also caused a lot of controversy,  questions and concerns. Skepticism was fueled by a number of experts  warning future pensioners against the risk of being left with nothing  in their old age. However, already by the beginning of the 2000s,  when the main problem in the country, as well as throughout the  world, was the trend of population aging (the ratio of the number of  workers to the number of pensioners was 0.9/1 - in fact, one working  citizen financed one pensioner), it was obvious that the introduction  of the MFPS was an imperative of the day. "Even under the most  optimistic scenarios of the country's socio-economic development, it  is impossible to ensure a decent pension within the framework of a  system financed on the basis of solidarity," notes former Deputy  Minister of Finance Karen Tamazyan, who stood at the foundations of  the system. As a result, in 2010, the RA Law was  adopted, and the implementation of the multi-stage funded pension  system started on January 1, 2014. Since July 1, 2018, the FPS has  become mandatory for all citizens of Armenia born after January 1,  1974 (for citizens born before January 1, 1974, a pay-as-you-go  pension system is in effect). Since July 1, 2018, the mandatory  component of the funded pension has come into force. Citizens born  before 1974 can also become participants in the system on a voluntary  basis. According to the supervisory authority, the Central Bank of  the Republic of Armenia, there are only 670 such today.  Over the past 10 years, Armenia has revised the amount of monthly  payments on them several times: since 2023, monthly mandatory  payments from a working citizen amounted to 5% of the salary, and the  same amount is contributed to the savings account of the participant  in the system by the state. However, if the salary of a participant  in the MFPS exceeds 500 thousand drams per month, the state finances  savings contributions in the amount of no more than 25 thousand  drams. A maximum limit has also been set for savings: in the amount  of 15 times the minimum wage. That is, savings are not made from the  part of the participant's salary exceeding 1 million 125 thousand  drams, 112 thousand 500 drams is the maximum amount that a  participant can save. The application of the last restriction can be  waived by contacting the tax authority.

Who do you trust with your hard earned money?

Since the introduction of the system and until today, there have been  only two pension fund managers in Armenia who received licenses from  the Central Bank of the Republic of Armenia in 2013 to manage pension  funds within the framework of the MFPS: C-Quadrat Ampega Asset  Management Armenia and Amundi-ACBA Asset Management. The shareholders  of the first one are the Austrian C-Quadrat Investment AG investment  company and the German Talanx Asset Management. In terms of assets  (about 150 billion euros), Talanx Asset Management GmbH is one of the  largest insurance and financial groups in Europe, represented in 150  countries. The shareholders of the second one are the French Amundi  company, which manages assets in excess of 2.1 trillion euros in 35  countries, and the Armenian Acba Bank.

Management companies offer three investment models: fixed income,  conservative and balanced.  According to the rules, the fixed income  model assumes that assets cannot be invested in equity securities and  derivatives based on them; according to the terms of the conservative  model, the weight of equity securities and derivatives acquired for  the purpose of hedging them in the fund's assets cannot exceed 25%;  According to the rules of the balanced model, the weight of equity  securities and derivatives acquired for the purpose of hedging cannot  exceed 50% of the fund's assets. Which of the specified strategies is  used to place funds, the system participants decides for themselves,  and their transition from one model to another is free once during  one year. Those who did not initially make this choice, the system  automatically places in a medium, moderate risk fund, that is, a  conservative one. As the risk level increases, so does the return on  investment. However, during periods of decline, these funds are more  confirmed by risk. This is confirmed by the recession of 2022.  Although, as practice shows, after a they recover the  fastest. Thus, for young people (aged about 30-35), who have a long  way to go until retirement, it is more reasonable to choose a  balanced fund. And if you have only 3 years until retirement, then it  is better to choose a fund with a stable return, experts advise.

Formation history

Back in 2018, then Permanent Representative of the International  Monetary Fund (IMF) in Armenia, Ms. Yulia Ustyugova, welcomed the  decision of the Armenian government to continue the implementation of  pension reform in the country. She noted that, according to IMF  estimates, continuing the implementation of pension reform is the  best way to solve the problem of poverty among the older generation  in 30 years.  "Let's not forget that the assets are managed by two  reputable management companies that operate in many countries around  the world. These companies have provided impressive profitability in  recent years," she added. In particular, since the introduction of  the funded pension system in the Republic of Armenia, the  accumulative profitability of funds managed by has  amounted to 116-121%, while accumulated inflation over this period  has reached 29-30%. As a result, the average weighted profitability  of citizens' pension accounts, adjusted for inflation, was  approximately 86-92%. The average annual return of   pension funds is about 7.8-8%. By the end of May this year, the MPF  manages assets worth 427.32 billion drams. Of these, 94 billion drams  is income provided by the results of management, 340.2 billion drams  were formed through deductions. The number of participants in the  three funds is about 370 thousand people in total, about 99% of them  in the conservative fund. There are about 3 thousand people in the  funds with stable income and balanced. As of May 31, 2024, the number  of participants in the three Amundi-ACBA funds reached 473 thousand  people, the volume of managed assets is 475 billion drams (97.7% in  the conservative fund). Of these, 92 billion drams was income  provided by the results of management, and 383 billion drams - from  deductions. About 4 thousand people are listed in the two small  funds. Over the first 10 years of the system's operation, the  accumulative yield of Amundi- ACBA was 103-113%. The real average  annual yield of citizens' pension accounts, adjusted for inflation,  reached 5-5.5 percent (excluding inflation). Hrayr Aslanyan, the  Amundi-ACBA Asset Management Fund Manager, believes that 2024 has  also started well - the funds' yield for 5 months is quite high,  fluctuating in the range of 3.3-4.2%. 

Over the 10-year period, the funds' performance increased rapidly,  and 2016, 2017, 2019 and 2023 stood out positively. The "leader" of  the negative growth was the year 2022, when the entire world economy  was "shocked" for well-known reasons, and Armenia could not stay  away. Notably, even in the year of the Artsakh war and epidemic, in  2020, the profitability of Amundi-ACBA was 9.8-10.7%, and C-Quadrat  Ampega was 10.6%-12.7%. 

Turbulent 2022

Perhaps it was during this period that most citizens remembered their  pension accounts and began to watch for developments. Those in charge  told us then: "No need to panic, everything is under control!" But,  as we know, real panic usually begins after such words.

Thus, taxpayers in Armenia, checking their funded pension accounts  for the second quarter of 2022, discovered that the balance on the  pension account not only did not increase, but even decreased, since  the level of return on funds turned out to be negative. Pension asset  managers and the Central Bank stated that the negative result was  facilitated by the revaluation of the national currency against the  dollar and the euro, inflation and the decline in prices of equity  and debt securities on international financial markets. In  particular, Amundi-ACBA closed 2022 with  negative balance of 3.5%.  7.7% and 9% for all three funds, respectively, but already in 2023  the figures have almost doubled to 12.3% (AMFIX), 14.3% (AMCON) and  14.6% (AMBAL).

The yield of C-Quadrat Ampega funds also was negative: they closed  2022  with negative balances of 4.5% (CQFIC), 8.2% (CQCON) and 8.9%  (CQBAL).  "In order to insure ourselves against risks similar to  those in 2022, we had to have certain instruments for hedging  currency risks,"  economist Edgar Aghabekyan points out. At the  moment, they are not available on the Armenian market, but further  development of the system should lead to it. At the same time, it  should be understood that the introduction of these mechanisms  involves new expenses, which may affect the profitability of the  funds, the expert warns.

Despite the scale of the 2022 crisis, already the following year,  according to C-Quadrat Ampega Fund Manager Petros Margaryan, the MPF  recorded the highest rate in the system's history. All three pension  funds managed by the MPF summed up 2023 with double-digit annual  returns: with a return of 16.5% had the highest  return among all six funds operating in the mandatory funded pension  system, and had returns of  12.6% and 16.3%, respectively.  This was due to several important  factors. Thus, the local market maintained a low inflation  environment, interest rates decreased, due to which Armenian assets  ended the year with significantly high results. "And since this is  related to the curve of our government bonds, a decrease in the rate  leads to a decrease in interest on bonds, their price began to rise,  which is good for funds whose main portfolio is in bonds," Margaryan  notes. Secondly, international equity and debt assets ended 2023 with  positive results. "We foresaw a quick recovery of the market, and  therefore increased the share of equity and debt securities  prematurely - at the end of 2022 - beginning of 2023, due to which we  closed 2023 with additional profit," says a representative of  C-Quadrat Ampega. The capital market is very volatile, notes in turn,  Amundi- ACBA Fund Manager Hrayr Aslanyan, the estimated value of an  investment unit may be one thing today and another thing tomorrow,  and that's okay. In the turbulent year of 2022 for the global  economy, Armenian pension funds were able not only to preserve their  investments, but also to recognize previously undervalued ones, on  the basis of which they invested more effectively. "As a result,  today we see that we are at the historically highest point for all  three funds," he says. The main thing in this matter is to consider  the situation in the long term, given that the funds' management  strategy is long-term, Aslanyan adds.

So where do our savings go?

The MFPS participants are transferred to a pension account opened in  their name shares of the selected pension fund in an amount  equivalent to the accumulative deduction, taking as a basis the price  of placement of the share of this fund. The cost of the share is  constantly changing. So, if the cost of one share at the time of the  fund's establishment was, say, 1000 drams, now it exceeds 2000 drams.

Investment geography

Pension asset managers invest all over the world. But, according to  the law, 60% or more of the fund's assets must be invested in  Armenian drams (AMD). The rest is recommended to be invested in the  countries of the Organisation for Economic Co-operation and  Development (the OECD accounts for 20% of the world's population and  about 60% of the world's GDP).

Today, the MFPS participants are co-owners of all the big and  resonant companies, giants of the world economy. The funds also  invest through the S&P 500 index, which is more efficient and less  expensive, since it allows you to invest in the securities of the 500  best public US companies with the largest capitalization in one  transaction.

In particular, Amundi-ACBA investments in national currency reached  67% as of the end of May this year: 38% of which are government  bonds, 20% are deposits in Armenian banks, 6% are in corporate  securities, 3% are ENA bonds, 0.4% are Team Telecom, 0.2% are  investments in the Amber Capital mutual Amber Capital ``EU Armenia  SME Fund``. 22% of foreign investments were in North America (in debt  instruments and shares of the US and Canada). 2% were invested in the  EU countries, 5% in the Eurozone, 2% in developed Asian countries and  exactly the same amount in developing countries. The funds do not  directly invest in the countries of Africa, Central Asia and Eastern  Europe. About 66.5% of C-Quadrat Ampega's investments are made in  Armenian drams, about 23.5% in US currency, the rest of the portfolio  is in European (4.02%) and Asian (2.82%) currencies. About 68% of  investments were made in Armenia, 22.2% in North America, 6.5% in  Europe, 2.8% in Asia. 45.5% of the FPS assets are RA government  bonds, 5.06% are RA corporate bonds, 2% are ENA bonds, about 18% are  bank deposits. 24% of investments are foreign equity securities, and  0.2% are alternative investments. According to the FPS managers, the  geography of investments changes periodically. depends on  many reasons. The Russian-Ukrainian conflict also made certain  adjustments: the USD strengthened its Safe Haven status and many  finances towards US government bonds, Swiss and Japanese  assets, etc. Thus, Amundi- ACBA's investments in the US was 19-20% by  2022, against the current 22%, C-Quadrat Ampega's investments were  15-20%, against the current 19-22%.

Why the real sector was "not loved enough"

Today, 38-45% of the total assets of the two funds in the RA are  invested in bonds, about 20% - in bank deposits. Local investments  are mainly directed to the financial and banking system of the RA,  IT, industry.  But the volume of investments in the real sector of  the economy is small.

At one time, the legislator set certain restrictions for funds, in  particular, investing in securities admitted to trading on the  regulated market operating in the Republic of Armenia or issued by  investment funds controlled by the Central Bank.

As Karen Tamazyan notes, this was done in order to ensure the safety  of assets. After all, companies that have received a listing work on  the principles of transparency and accountability, which guarantees a  higher level of investment protection. "That is, we prioritized the  security of the funds entrusted to the funds. In addition, this  should have become a powerful incentive for companies seeking to  attract more investors through a public offering," the expert points  out. According to the authors of the law on the FPS, this was  supposed to lead to the formation of demand in the financial market  and the creation of appropriate instruments.

But, as the heads of the management funds note, perhaps this was done  with the aim of motivating local businesses to go public. But over  time, it became clear that the culture of the stock market in Armenia  is developing slowly, and private individuals are not very willing to  go public.

In this regard, in 2022, the Central Bank of Armenia came up with an  initiative that, among other things, will allow fund managers to  directly, bypassing the capital market, invest in the real sector of  the RA economy. The goal is to manage the accumulated money of  citizens in such a way that they not only provide profitability, but  also invest in the national economy, contributing to economic growth.  The regulator also proposed allowing funds to invest not only in  bonds issued by the state and the Central Bank of the Republic of  Armenia, as stipulated by the current law, but also in securities  fully guaranteed by communities. Despite the obvious benefits for the  economy, for reasons unknown to us, the initiative of the Central  Bank has not yet become law. "The Central Bank's initiative will  provide an opportunity for additional risk diversification for fund  managers, and for the real sector, which is currently financed  primarily through bank loans, this promises additional, possibly more  profitable and effective resources.  However, this assumes more  transparent work for the real sector, and perhaps many of them are  not ready for such a level of publicity now", notes Edgar Aghabekyan.  The imperfection of the RA financial market still remains a serious  problem in terms of diversification of fund investments, he believes.  As a result, fund managers, having no alternative to equity  instruments on the local market, are often forced to direct part of  their risky investments, including those with added value, to  international financial markets.

Real and Imaginary Risks

"In the bad year of 2022, when inflation was high, the authorities  asked themselves - what if the trend continues, the state will face  the task of fulfilling its obligations to the participants of the  funded pension system (the RA guarantees the return of the  participant's funded contributions in the amount of social  contributions adjusted for annual inflation), and this will be a huge  burden on the shoulders of the state budget. The MPF, having made  calculations, presented to the authorities the expected overview,  according to which the probability of inflation exceeding the yield  in the context of individual years is estimated at 30-40%, but in a  cumulative sense, the probability that the cumulative yield of the  fund in the next 30 years may be lower than inflation is close to  zero," says Aslanyan.  Risks are always present, the task of the  funds is to manage them as effectively as possible, he adds.

Why are in the person of management companies  needed? 

Many people are interested in what is the reason for engaging an  intermediary in order to save their own funds. After all, I can save  money myself, keep the money "under my mattress", or entrust it to  the bank at interest.

"There is a small probability that at least 5% of the population will  decide voluntarily, and in a monthly format, to save money, and even  with an eye on 30-40 years ahead,"  responds C-Quadrat Ampega Fund  Manager, Petros Margaryan. In addition, even if we imagine that some  citizens save money using bank deposits, then in this case, firstly,  sufficient financial literacy is required, and secondly, secondly, no  bank can offer interest income on deposits that exceed the figures  recorded by funds in 2023, he adds. In addition, the funds have the  necessary resource to calculate the credit risk for financial  instruments, and due to their scale, they provide negotiating  benefits. 

When and how will it be possible to receive a funded pension?

The first beneficiaries of the system will be able to receive their  pensions in 2037, through annuity, program and one-time payment. If a  citizen had 10 years or more of work experience before joining the  system in 2014, heshe will receive a basic pension, which today is  24 thousand drams, and to it will be added additional payments for  work experience before 2014, plus hisher savings.

The specific amount of the expected funded pension, according to the  MPF managers, depends on many factors. As expected, a citizen's  pension, will amount to 50 to 70% or more of hisher last salary,  depending on the size of the salary, the duration of pension  contributions and the period of receiving funded pensions, if the  current level of profitability is maintained. My pension, according  to the online calculator (I only entered my net salary, year of  joining the MFPS and year of birth) should be 60% of my current  earnings. As for foreign citizens - participants of the Armenian  MFPS, they will receive a pension in accordance with the laws of the  Republic of Armenia if their funds are accumulated and managed by the  above-mentioned two MPFs. But if a participant in the system is a  citizen of another country, upon returning to their country, the  savings can only be transferred if there is a similar non-state  pension fund in their country that is ready to accept these accounts.  At the same time, this opportunity will be available to citizens who  were already foreign citizens at the time of joining the system. If  there is no such system in the new country, the MFPS participant will  have to wait until they reach retirement age according to Armenian  laws. Their assets will continue to be managed and accumulated. The  opposite option - transferring pension savings from another country  to the Republic of Armenia - is not envisaged, since the Armenian  system is directly tied to wages with deductions of a maximum of 10%.

P.S. Retirement is a "costly affair".

According to Karen Tamazyan, actuarial calculations carried out as part of the implementation of the system showed that if a person saves approximately 10% of hisher earnings from the age of 40 (for 25 years), then by the time of  retirement (with an average return on funds of 5%), hisher pension  should amount to an average of 50 to 80 percent of the pre-retirement  income level. This, as evidenced by world experience, should be  sufficient to maintain the standard of living after retirement.