If double-digit inflation continues, the pension fund returns will be negative

If double-digit inflation continues, the pension fund returns will be negative

access_time2021-10-27 12:00:09

In Georgia, 1,166,737 people participate in the funded pension scheme and contribute 6% of their salaries monthly to the pension fund. At the moment, the fund has accumulated GEL 1.7 billion.


The other day the pension agency presented to parliament a report on the work done in the first half of 2021, and as it turned out, the funds accumulated in the fund were placed on deposits in 8 commercial banks at 11, 15% per annum.


“70.3% of the amount is invested in deposit certificates and time deposits, a fixed interest is charged on them, the remaining 29.7% are placed in deposits with a variable interest rate. The placement of assets complies with the Georgian law on accumulative pension - in particular, banks have a high credit rating, and the fact of placing funds in 8 banks excludes the concentration of amounts and violation of the rules of antimonopoly legislation. The average maturity of certificates of deposit and term deposits is 2.5 years, the average term of the total portfolio is 1.7 years, ”the pension agency says.


From January 1, 2019 to June 30, 2021, the fund's profitability was 24.5%, with inflation of 17.8%. in the reporting  period, the lari has lost 18.2% of its value, and given all this the question arises of how profitable is to keep the savings in the national currency for many decades ahead amid annual devaluation?


Former director of the Pension Agency Levan Surguladze believes that inflation is currently the biggest threat to savings in the pension fund.


“The situation with term deposits is quite difficult as despite the high interest rate, it is very doubtful that the profit from the deposits could compensate for the inflation rate and the laris devaluation. While the  profitability of deposits with a variable interest rate is tied to the central bank’s refinancing rate. The rate rises when inflation rises, but as a rule, inflation rises faster than the refinancing rate. In 2020, inflation was relatively low, but in the third quarter of 2021 it rose significantly and the fund's savings went negative. Besides, what matters is the fund's annual profitability and not throughout the entire period of its existence, ”he explains.


 According to Surguladze, the devaluation of the national currency also has a negative impact on the fund's profitability.


“To ensure some stability of deposits, it would be correct to use a clause in the law that allows keeping 20% of the fund's accumulations in foreign currency, but now it makes no sense - when the law was adopted, the interest on deposits in foreign currency stood at 5-6%, now it is several times lower, ”he points out.


In  the words of the former Director of the Fund, when the fund was created, it was envisaged that placing of deposits in Georgian banks was a temporary solution and later the funds were planned to be placed in securities on Western stock markets, but the process has not begun yet.


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