INDEXO was founded with the mission to improve the pension system in Latvia, so that people saving money in the 2nd and 3rd pillar could rely on their savings for their retirement. Ever since INDEXO came to the market, there has been significant progress made with:
- Lower fees for everyone – the base fee is regulated and is decreasing as the funds grow;
- Several other fund managers have introduced index funds, which is the best way to invest pension savings;
- There is a 100% equity fund that allows for the savings to grow along with the world equity markets
- 2nd pillar funds can be inherited.
Lower fees and being allocated to equity index funds with low fees will allow the savings to compound by tracking closely the market indices, that historically have been growing at over 8% per annum. It is always important to remember that the markets are volatile and there are periods of low or negative returns, but as the pension savings are built over a time period that is over 40 years, the short-term volatility does not have an impact for most savers.
So much has improved, but here at INDEXO, we have ideas, how to make the pension system work even better for the savers.
Firstly, we of course hope that more people would choose low cost index funds that are age appropriate. There is still a large number of people who are in excessively conservative funds. If your age is 45, you should still be in 100% equity fund to maximize the investment returns over the remaining saving period.
To improve fund choice, INDEXO proposes, that everyone would have an automatic personal investment account, where the risk is reduced according to person moving closer to retirement. For that we, the pension fund managers, should have data about the clients, so that an appropriate investment strategy could be selected. That would also allow more personal approach to help the saver choose the right strategy for saving in the last 10 years preceding retirement depending on their financial standing. INDEXO has introduced an excellent 3rd pillar product that represents what we think should be the product also for 2nd pillar customers. There is some movement towards this expected in 2024 and we at INDEXO welcome that.
Secondly, we think that transparency and accessibility of the information published by funds should be improved. Manapensija.lv is a good site for getting information about the pension products, but it lacks good overview of all costs managers are charging their customers. It is not easy to understand the fees, as some funds are also charging performance related fees. We do not see what are the indirect costs that the customers are charged. As the importance of the voluntary saving through 3rd pillar is increasing, we think fees and performance related information should also be made available on manapensija.lv. Only full transparency can help people build trust towards fund managers and help them to take informed decisions.
Third, over time more and more people will start drawing pensions also from their second pillar funds. Currently the options how to withdraw that money from the funds are restrictive and the insurance solutions are expensive due to lack of competition. To get better priced services and more flexible solutions that would fit the individual demands of the customer, a funded pension should be introduced, where the pension fund can be the pension provider. Increasing competition would drive down fees and leave more money at the hands of the savers.
As the assets of the 2nd pillar system are growing, it would be important to make sure that some of these savings will end up in the local capital markets. We consider that 5-10% of the assets of the 2nd pillar market should be invested in Latvia, but obviously the funds can invest more. These investments should support local equity markets, bond markets and investment funds investing into private equity and real estate locally. Buying Latvian government bonds should not qualify in that allocation as the demand for Latvian government bonds is anyway high due to the good credit rating of the country. Such investment would allow increased access to capital for local companies and would also lower the cost of capital, creating new jobs and help to build new homes.
As INDEXO is growing and will in 12 – 18 months reach close to 1 billion assets under management, we understand that our commitment to local capital markets needs to be more significant. For this purpose, we have co-founded a local real estate fund management that will create the first low cost real estate fund that will over time also become accessible to retail investors. INDEXO has committed to invest approximately 5% of our AUM over time into this fund.
Overall, we assess that the pension system is in a much better shape than when we started. Most importantly the costs are decreasing and are low in comparison to many other European markets. The move to 100% equity and increasing number of people having age-appropriate allocation is under way. Individual accounts would significantly speed up that process. If our other suggestions will be implemented in one way or another and people start saving more actively in the 3rd pillar, we would have a well-functioning system, that would allow people to retire with comfortable income from private savings.