Pension Reserve Fund
The Pension Reserve Fund of The Republic of Srpska was established on the 31st of May 2010. The aim of its establishment is to support the long-term financial viability of mandatory pension insurance. The main activity and the main goal of the Pension Reserve Fund are to invest in securities and other assets with respect to the principles of safety, the dispersion of risk, liquidity, and profitability in order to increase the assets of the Pension Reserve Fund. The total capital of the Pension Reserve Fund at the time of its establishment was 274,812,575.00 BAM, and total capital on the 31st December 2023, after an increase in additional capital in shares were 278,608,989.00 BAM. The Governing Body of the Pension Reserve Fund is the Assembly. The function of the Assembly for Pension Reserve Fund performs the Governing Board of the Pension and Disability Insurance Fund of the Republic of Srpska.
Pension Reserve Fund as a legal entity appears in its own name and for its own account only in relation to the Management Company. Pension Reserve Fund in its relations with third parties is represented by the Management Company.
Pension Reserve Fund of Republic of Srpska (further PREF) has started in 2011 with the asset under management of approximately 140m EUR. In the beginning in 2011, an asset of PREF comprised entirely of shares in companies that undergo the process of privatization in the Republic of Srpska (one of the Bosnia and Herzegovina constitutive entities). The starting portfolio of PREF had shares in 770 companies (with a maximal ownership stake in the company of 10%). Between 770 companies there where some of the most successful companies in the Republic of Srpska like telecommunication companies, companies from the electric utility system of Republic of Srpska (hydro and thermopower plants), then small and medium companies but also over 200 companies that are in some phase of the bankruptcy process. Owner of PREF (100% owner) is Pension and disability insurance fund of Republic of Srpska (carrier of the first pillar of pension insurance) so the the main goal of PREF activities if to pay out part of the yearly profits in the form of a dividend to the founder in order to support payments of pensions from the first pillar in Republic of Srpska. To conclude, PREF is state-owned reserve fund who manages asset arose in the privatization process that was intended to Pension and disability insurance fund of Republic of Srpska (Bosnia and Herzegovina). Until 2017, in Bosnia and Herzegovina, there have not been any mandatory or voluntary pension funds that comprised the second and third pillar. In the Republic of Srpska, Law on voluntary pension funds and pension plans were adopted in 2009, so it was a prerequisite for establishing the first voluntary pension fund in 2017 (www.epf.ba).
When PREF was founded, the basic characteristics of the companies in the portfolio were that there were not dividend-paying, while one-third of the portfolio was in some phase of the bankruptcy process and most of the shares from the portfolio even publicly listed on Banjaluka stock exchange were highly illiquid. Considering that one of the main goals of one pension fund is to have a portfolio that is safe, profitable, liquid and diversified, inherited the portfolio was necessary to restructure and to close it up to the wanted frame. As a result of our activities in the period 2011-2023, the portfolio has increased its liquidity, profitability, safety and become more diversified.
Since its foundation in 2011 PREF has started to restructure its inherited portfolio. In the beginning, 100% of the asset were shares of companies listed on the Banjaluka stock exchange. Proceedings from the sale of non-dividend paying companies were used to invest in the bonds, treasury bills, and bank deposits. As a result of the restructuring process so far, on the 31st of December 2023, 47% of the total portfolio is in shares from domestic and foreign issuers (approximately 72m EUR ), while the other 41% is now in bonds, treasury bills and bank deposits (approximately 62m EUR). In the total portfolio, the value of shares Telekom Srpske hold 18.15%, shares in 10 companies from the electric utility system of Republic of Srpska (3 hydropower plants, 2 thermopower plants, and 5 distribution companies) account for around 18% of the PREFs portfolio, while other assets in shares consist of 82 companies also listed on the Banjaluka stock exchange and foreign markets. Beside named companies, in the PREF portfolio there are 139 companies that are not valued since they are in some the phase of bankruptcy so in accordance with international standards of financial reporting, no values are given to them. Equity investments in foreign stock exchanges consist of 8 issuers (6 companies and 2 investment funds) which fair value is 1% of total asset value.
Every year, PREF had a profit of 4.1m EUR on average and the founder received a dividend for each year 2.9m EUR on average.
In 2023 total income amounted to 6 million EUR approximately. The majority of income came from dividends that were paid to PREF from companies in PREFs portfolio (around 65%). The most profitable company in the PREFs portfolio is Telekom Srpske that paid 1.74m EUR of dividend to PREF in 2023, thus making it 45% of all dividend income. Unlike previous years, in 2020 PREF started with equity investments in foreign stock exchanges, so the dividend income from 20 foreign companies and 13 investment funds gave share in total dividend income (299,533.00 BAM). In 2023, by our dynamic activities in foreign stock exchanges we gained realised profit from sale of shares in amount of 5.2mil BAM (approximately 2.6mil EUR).
The restructuring process, based on investments in bonds and deposits, resulted with continuous interest income, which in 2023 amounted to 2.1m EUR or 35% of total income. Compared to the previous period with positive trend in interest rates, after 2017, interest income declined, due to the general decline in effective interest rates, which however started to recover in 2023. Most prominent results came from investing in bonds in the period 2011-2014 due to high secondary turnover with bonds that state issued to the general public in order to repay war damage (with maturity within 15 years) and old saving debt (with maturity within 5 years). In this period, this series of bonds were traded with significant discounts on Banjaluka stock exchange and PREF was one of the biggest investors in this instrument. When banks, insurance companies, and foreign investment funds become more interested in these bonds, prices began to grow and yield fell.
Investment activities, as well as all other activities (first of all based on corporate governance and proxy voting on all shareholder assemblies), led to the positive trend of increased profitability especially in the period 2011-2014. The period 2015-2017 had an increase in interest income, while total revenues had a decrease due to the decline in dividend income, with the largest contribution of Telekom Srpska's dividend. However, according to indicators, in the last five years (2019-2023) we recognize that stability in operating revenues has been achieved, and the continuity of the portfolio restructuring process has been maintained.
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
| Income from interest (mil. BAM) | 2.63 | 3.7 | 4.52 | 4.86 | 4.95 | 4.76 | 4.7 | 3.89 | 3.4 | 3.1 | 4.1 |
| Total business income (mil. BAM) | 15.28 | 15.90 | 15.16 | 11.31 | 11.93 | 10.71 | 10.34 | 10.16 | 11.7 | 11.1 | 11.7 |
The net asset value of PREF ranged from 163m EUR to 107m EUR, and at the end of December 2023 it amounted to 152.7m EUR. Reasons for the fall of the net asset value of PREF comparing to the value at the foundation is that from inherited portfolio companies went bankrupt and PREF had to recognize expenses on that basis, and on the other hand, average fall of share prices on the Banjaluka stock exchange (index of Banjaluka the stock exchange recorded 39.66% fall in the period from 2011 until the end of 2020).
Beside named activities, other activities of the Managing company of PREF are conditioned by the structure of the PREF portfolio, which is still dominated by shares. The goal is to decrease the participation of shares and to further increase debt financial instruments participation and thus increasing interest incomes, PREFs profitability and stability in assets value. Along with the dominant conservative investment policy, amendments to the Law on PREF and the Investment Policy statement give possibility for exposure to risky instruments, with the aim of achieving higher profitability rates.
Besides activities taken on the restructuring of the PREF portfolio, we take great emphasis on corporate governance in the companies from the PREFs portfolio. Since the foundation, we have taken participation in 3,113 shareholders assemblies until the end of 2023. By incorporating PREFs representatives into the boards that manage or supervised in various companies from the PREFs portfolio we try to get as much information on that company operations but also to transfer good corporate governance practice.
