Dear members of OTP Pension fund!
We understand your concern about the results of the fund in March. And we want to comment on the situation and explain why the fund’s assets “demonstrated a minus”.
Therefore, we provided short answers to your main questions.
My account balance has decreased. What is the matter?
The matter is that the revaluation of bonds which occupy 43% of the fund’s assets.
Will I lose this money?
No, the assets are decreased now, but the yield on them have increased. That is, your assets are increasing at a faster rate, because they are currently operating not at 11%, but at 19% per annum.
Correspondingly, everything will return to its usual state, either from a reverse revaluation (when the rates will decrease again) or from the redemption of G-bonds (if we hold the bonds to the redemption, we will get an expected yield).
How the pension fund’s assets accounting is made?
According to the international standards and international practices, the assets of a fund should be valued at their market value, and usually, it is the exchange price. Unfortunately, in Ukraine, most G-bonds transactions are OTC, which makes it impossible to receive the daily exchange value of G-bonds. For the purpose of revaluation of G-bonds, we take the value of the bonds published by the NBU on its website to “disclose the information on fair value of G-bonds in the statements”. See via the link below: https://bank.gov.ua/markets/ovdp/fair-value.
In March, the yields on the secondary market of government bonds have increased from 11% per annum at the beginning of the month to 19% per annum at the end of the month. The increase in the yield on bonds always leads to the fall in prices for such bonds, and the longer the maturity of the bond, the greater the fall in price. Therefore, in March, the value of bonds decreased by 9%-11%.
Since almost half of OTP Pension’s portfolio is held by government bonds (G-bonds), a significant drop in the value of the bonds had a negative impact on the fund’s assets.
Could there be a default on government bonds?
Default is out of question. The macroeconomic indicators in Ukraine show the strength of the economy despite the crisis: after the short-term UAH devaluation, the USD supply on the interbank market exceeded the demand of this week, which led to the strengthening of UAH to 26.9-27.3, the inflation remains at record low levels, and the extend cooperation with the IMF and other global donors is expected.
Will the NBU’s negative revaluation be constant from?
No. This is a temporary phenomenon caused by the coronavirus pandemic and the unpredictability of the new government and the Verkhovna Rada.
When will the situation improve?
Most likely, the secondary market will recover and respond to the increase in the value of G-bonds after the quarantine.
We expect that the situation will improve in May-June and the assets will return their prices and value to the level of January-February this year.
What are the expectations for the OTP Pension’s yield by the end of 2020?
Given the above, by the end of the year, OTP Pension will be able to yield its depositors more than 8% per annum.
Read the more detailed comment in the previous news release.
Finally, an advice from the professional stock market participants: Assets should be accessed when they went down. So do not be afraid of falling, you can use this situation.
