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Banks commending this year's pension funds performance

LHV and SEB headquarters in Central Tallinn.
LHV and SEB headquarters in Central Tallinn. Source: Siim Lõvi/ERR

While 2022 was a weak year for pension funds, inflation accelerated and the European Central Bank (ECB) hiked interest rates, this year, funds are performing very well, banks say.

The current, ending year is to some extent a converse image of last year. Markets have seen recovery. The year started off with fears of a recession sparked by rapid interest rate hikes, however the economic downturn turned out to be more limited than feared and boosted optimism on the stock markets, said Swedbank pension funds portfolio manager Pertti Rahnel.

"Funds with higher proportions of shares have performed especially well, where yields are even reaching a little more than 10 percent," Rahnel said. "Swedbank's pension fund for those born in the 80s – this fund's returns since the start of the year have been just over 10 percent. Bond funds have also seen decent returns  – such as more than 5 percent on the Conservative Pension Fund."

Overall, the past year has been an interesting one for pension funds. Numerically speaking, stock markets have been doing pretty well, however growth is being driven by a very narrow sector of businesses, while the situation in all asset classes is as expected, said LHV CEO Vahur Vallistu.

"Real estate portfolios are in good shape," Vallistu noted. "We've been boldly increasing our bond holdings, and returns are good there as well. Where we've fallen behind the market somewhat is the technology sector, as prices there are quite high, but these companies have been growing quite rapidly, and we've lagged behind this growth."

Things are a bit more complicated for LHV's green funds, which made a big splash a couple of years ago but don't have the same momentum anymore. The bank's index fund is leaning toward Asia. Nonetheless, if this year's overall inflation remains close to 5 percent, pension funds' returns will exceed that.

"People tend to overestimate that annual inflation a bit," Vallistu pointed out. "Inflation was very high last year, and then we fell short. It's too early to say, but right now it looks as though we may indeed exceed inflation."

In terms of third pillar pension funds, Tuleva's third pillar funds, for example, have seen returns since January 1 of 16 percent, but extending this range back to December 6 last year, returns totaled 9 percent. Tuleva Fondid AS board member Sten Andreas Ehrlich said that one year's performance doesn't quite convey the right info.

"I suppose it's that pension funds mimic financial markets, and financial markets are constantly fluctuating," Erlich explained. "And it just so happened that there was a big drop in December of 2022 and through the start of this year, and then at the beginning of this year they began to rise."

Figures from the first three quarters of 2023 indicate that contributions to Tuleva's third pension pillar have increased by 15 percent on year.

"But this doesn't show whether there are more people making payments [into the pillar] during the year or whether payments have increased," Erlich added.

LHV confirmed the monthly growth of contributions as well.

"The majority are clients with automatic payments, but that number could be higher," Vallistu said. "That's approximately 120,000 people across the market contributing to their third [pension] pillar."

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Editor: Aili Vahtla

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