7 January 2021
The main keywords of 2020 were coronavirus, restrictions that obstructed economic activities and personal freedoms, increased unemployment and unprecedented quantitative easing by governments to inject money into the economy.
In Q1, we experienced a remarkable fall on the stock markets, which was followed by a rapid recovery. Several large stock markets ended the year with record results.
The turbulent year proved once again that LHV pension funds are great at adapting. Despite the complicated conditions, we earned a decent income for the savers: LHV’s clients earned 65 million euros after the subtraction of all fees with all seven second pillar funds. With the performance of third pillar funds included, the net yield of LHV’s pension savers last year amounted to almost 67 million euros.
Green trends in saving
Last year, Estonian retirement savers gained a new, green option for investing their pension savings when the second pillar LHV Pension Fund Green started investing in March. We also opened the similar third pillar fund LHV Pension Fund Green Plus in December.
The green revolution in the world has boosted the value of the units of the Green Fund that started operating in March. Local pension savers have also welcomed the first Estonian green fund: the fund had 3,891 investors by the end of the year.
Considering the rush to save in the third pillar in the last months of the year (the third pillar customer base of LHV more than quadrupled), a pension fund that is markedly distinct from the other options on the market was very welcome. Thus, LHV Pension Fund Green Plus accumulated approximately 7,000 new unitholders in just a month.
Focus on OTC investments
The provisions of the Investment Funds Act, which was amended two years ago, gave fund managers more freedom in investing as well as new, more ambitious goals. Performing better than the competitors alone is no longer the benchmark of success – you must also stay ahead of the speed at which social tax is received in Estonia.
Thus, the objective of LHV pension funds is to find the kind of long-term investments the expected returns of which could exceed the increase in the receipt of social tax. In other words, we focus on long-term investments whose expected returns exceed 6%.
In 2020 we completed several OTC investments that support local businesses. We financed the establishment of the renewable energy company Sunly and Peetri Centre by subscribing for bonds and acquired the Valge Maja and three industrial buildings in the Jüri Industrial Estate.
We launched the development of even more rental buildings and invested in Estonian forests via Birdeye. We successfully sold our investments in Auto24 and Thermory. High expected return is the common denominator of all the investments we’ve made and sold.
Return matters when saving
Last year the equity risk of the actively managed second pillar pension funds of LHV was lower than that of competitors. This meant a smaller fall and also allowed us to start taking new positions more aggressively in March.
Among the funds that operated on the market throughout the calendar year, the best performance of 2020 was achieved by LHV Pension Fund XL, whose returns after the subtraction of all fees was 7.57%.
The best performance among third pillar funds that operated throughout the calendar year was achieved by LHV Pension Fund Supplementary, which ended the year with returns of 8.61%.
On account of returns alone, the seven LHV second pillar funds earned 65 million euros for savers and all of the fees have already been subtracted from this amount. The profit earned by LHV retirement savers including the contribution of the three third pillar funds was almost 67 million euros.
The benchmark index, which is one of the measures of the success of pension funds, is the increase in the receipt of social tax and in 2020 it amounted to 2.5%. This indicator was also strongly affected by the unemployment insurance benefits financed with public debt.
In a situation where the payment of state pensions in the future depends increasingly more on the benefits financed with loans granted by the state, the faster growth of the second pillar is also in the interests of all retirement savers.
Beating the benchmark index and growing the assets of retirement savers faster in the second pillar when compared with the first pillar allowed LHV pension funds to charge 6.2 million euros in success fees for their performance in 2020.
This is good news for the clients of LHV pension funds, who earned returns that beat the benchmark index and were the best or close to the best on the market, as well as for the 10,000 shareholders of LHV.
Challenges in 2021
The pension reform will certainly be the biggest variable in the new year. Last year’s performance speaks in favour of saving for the long term.
The second pillar, which is relatively independent of how well Estonia is doing in general, is a good addition to the state pension. This is a unique investment opportunity, which is strongly supported by the monthly 4% received from the state on account of social tax and the incentives in retirement age. It would be a sin to not take advantage of the tax-efficient investment opportunities created with the second and third pillars.
Chairman of the Management Board of LHV Asset Management
LHV Pension Fund XL and LHV Pension Fund Supplementary, both of which are managed by LHV, achieved the best performance in 2020 among mandatory and voluntary pension funds alike.
The average geometric annual performance of the funds in the last two, three and five calendar years is 6.68%, 4.36% and 4.16%, respectively, in the case of the LHV Pension Fund XL and 8,45%, 4,99% and 5,24%, respectively, in the case of LHV Supplementary Pension Fund.
The value of fund units may go up as well as down. The past performance of funds is not a promise or indication of their performance in the future. Preservation of the money invested in the fund is not guaranteed.
LHV pension funds are managed by LHV Varahaldus. Read the prospectus and key information documents of LHV pension funds at lhv.ee and consult an expert.