10 January 2022
At the start of last year, we anticipated that the recovery of the economy will be slow and laborious, but we’ll have to think less about the coronavirus. The exact opposite happened: new strains of the virus have meant new waves of infection and new restrictions, and also postponed people’s return to the office.
Estonia’s economy, on the other hand, has fared much better than expected. The economic growth forecast by Eesti Pank for 2021 in December 2020 was 2.9%, but the actual growth on the basis of the new forecast published a couple of weeks ago was 8%. We saw a similar trend elsewhere in the world as well. This is the reason why the stock markets of developed countries did very well last year.
In terms of pensions, the increase in the pension insurance part of the social tax received, which is a function of the increase in wages and the employment rate, is even more important than the economic growth. It largely determines the indexation rate (i.e. the annual growth) of first pillar pensions and also serves as a benchmark for the actively managed pension funds of LHV.
The objective of the largest pension funds of LHV Varahaldus is to ensure that, irrespective of what is happening on stock markets, the pension assets of our retirement savers grow faster than the state pension. We’re pleased to report that, although the benchmark index grew by 7.7% instead of the forecast 1.6%, our largest actively managed funds L and XL were able to outperform it.
Impact of pension form smaller than expected
2021 was also the year of the pension reform, which allowed people to withdraw the money they had saved so far – on the account of future savings and subject to a hefty tax. However, many people in Estonia decided to continue saving in all counties, in all age groups and also among all income groups.
In our stock exchange release published in February last year, we expected that the volume of the funds will be a little over €1.2 billion and we’ll have almost 130,000 active clients by the end of the year. In fact, the volume of the funds turned out to be more than €100 million and we have almost 140,000 clients who make contributions once a month.
The coalition agreement, which was the basis for the implementation of the pension reform, was signed on 6 April 2019, and the total volume of all second pension pillars operating in Estonia was a little over €4.2 billion at the time. The total volume of pension funds by the end of the last year was approximately €4.5 billion. The volume of the third pillar has more than doubled in the same period of time: it was almost €400 million by the end of 2021.
Despite the fact that some retirement savers have decided to leave the pension system, the assets of new savers and those who continue saving have grown even more. After all fees are taken into account, we generated returns of more than €126 million for the clients of the second pension pillar fund of LHV Varahaldus and approximately €5 million with third pillar funds in 2021.
Unique funds with a unique strategy
We still see in our actively managed funds that the best way to outperform the benchmark index over the long term is to focus largely on over-the-counter investments, including investments related to Estonia, alongside listed assets. In their case, we have a better overview of companies’ cash flows.
Speaking of direct property investments, the pension fund portfolio of LHV includes 293 rental flats, two office buildings, three stock office buildings and a production building. All the buildings have a high occupancy rate and rental income is generated as foreseen in the business plan.
The events of the last year that deserve a mention are the completion of the Aiandi street apartment buildings for rent in Mustamäe, Tallinn, the completion of the building design that’s the basis for the renovation of the office building at Tartu mnt 63 and assessment of buildings on the basis of the BREEAM sustainability standards. LHV pension funds took advantage of a favourable interest environment and raised bank loans in order to achieve a higher return on equity.
The events of the last year that deserve a mention are the completion of the Aiandi street apartment buildings for rent in Mustamäe, Tallinn, the completion of the building design that’s the basis for the renovation of the office building at Tartu mnt 63 and assessment of buildings on the basis of the BREEAM sustainability standards. LHV pension funds took advantage of a favourable interest environment and raised bank loans in order to achieve a higher return on equity.
The favourable impact of the long-term strategy is becoming increasingly more obvious in the private capital funds in which we’ve invested for almost 10 years by now. In 2021 we successfully exited several investments and gained access to truly large global players, which allows us to spread the private capital funds. Last year, we also made two co-investments with private capital funds, thereby taking a holding in the local Piletilevi and in the UrgentMED chain of clinics operating in the US market.
Our best investments in green funds last year were related to electric vehicles, insulation materials, electrification and waste management. We made more than 250 transactions with green funds and participated in four IPOs in 2021. There were 53 thematic investments in green funds by the end of the year.
Good year for retirement savers and good starting point for next year
After all fees, the M, L and XL pension funds returned 5.3%, 9% and 10% respectively last year. It was a great year for Indeks, the broad-based pension fund with equity risk: the value of a unit increased 22.8%. 2021 was somewhat more modest for the green pension fund after the preceding year of strong growth: the annual return was 2.9%. All third pillar funds of LHV also achieved positive results.
As already mentioned, a successful year for LHV pension savers meant that the net income earned for unit holders across all pension funds totalled €131 million. The majority of this – approximately €109 million – was related to the performance of funds L and XL. Pension funds L and XL outperformed the benchmark index for the second year running, i.e. unit holders increased their pension assets faster than those counting on the state pension alone.
This allowed LHV Varahaldus to collect €2.6 million in performance fees for the results achieved in 2021. An example for comparison: the pension assets of a client actively contributing to fund L, who started the last year with €10,000 in the account and earns a gross salary of €1,500, increased by €1,516 over the year after all fees. The impact of the return alone in this was €916. The performance fee was 28 euros, which has already been deducted from the return.
2022 promises to be an eventful year. The coronavirus is still here, inflation is threatening to really pick up and be more persistent than initially expected. The support and quantitative easing offered by central banks at the start of the pandemic are about to end or decrease.
We believe that the actively managed funds of LHV are well positioned for the challenges ahead. The largest pension fund (L) started 2022 with a portfolio of around 20% invested in property, 20% in private equity and 10% in local corporate bonds. A little over half of the portfolio has a good return profile but is less exposed to equity market risk and offers at least partial inflation protection. It takes years to build such a portfolio and this requires a dedicated and capable investment team.
Our goal remains the same: to deliver returns that outperform the benchmark index with our largest actively managed funds, but to do so in a way that takes a long view and is less exposed to events in global equity markets. Our activities must also contribute to the success of the Estonian economy.
We want to continue to offer pension funds that are clearly differentiated from the alternatives on the market. LHV’s conservative funds S and XS tend to hold short-term positions in a low interest rate environment and are open to future opportunities. Funds M, L and XL are largely concentrated in unlisted asset classes, are most heavily invested in property, corporate bonds and private equity, whilst still actively seeking opportunities in equity markets. Pension fund Green invests in companies that contribute to and generate returns from the green transition, and pension fund Indeks has a much higher emerging market weight than its competitors. We are keeping the same line in our third pillar funds.
LHV pension funds are managed by LHV Varahaldus. The values of fund units may go up as well as down and the past rates of return of the funds are neither a promise nor an indication of the rates of return in future periods. Preservation of the value of the amount invested in a fund is not guaranteed. Read the prospectus and key information documents of LHV pension funds at lhv.ee and consult an expert.
The average annual return of LHV Pension Fund XS for two, three and five years is 0.11%, 0.51% and 0.32% per year. The average annual return of LHV Pension Fund S for two, three and five years is 0.02%, 0.44% and 0.16% per year. The average annual return of LHV Pension Fund M for two, three and five years is 3.11%, 3.23% and 2.62% per year. The average annual return of LHV Pension Fund L for two, three and five years is 6.97%, 6.58% and 4.51% per year. The average annual return of LHV Pension Fund XL for two, three and five years is 8.79%, 7.78% and 5.29% per year. The average annual return of LHV Pension Fund Indeks for two, three and five years is 10.4%, 15.26% and 8.98% per year. The average annual return of LHV Pension Fund Täiendav for two, three and five years is 8.38%, 8.35% and 5.68% per year. The average annual return of LHV Pension Fund Indeks Pluss for two, three and five years is 13.55%, 17.68% and 10.74% per year.
Read more