The Pension Reserve Fund of the Republic of Srpska was established on 31.05.2010. The purpose of its establishment is to support the provision of long-term financial sustainability of mandatory pension insurance. The activity of the Reserve Fund is to invest in securities and other assets while respecting the principles of security, risk dispersion, liquidity and profitability, and in order to increase the assets of the Reserve Fund. The total share capital of the Reserve Fund at the time of its establishment amounts to 274,812,575.00 KM. The body of the Reserve Fund is the Assembly. The function of the Assembly of the Reserve Fund is performed by the Management Board of the PIO Fund.
In legal transactions, the Reserve Fund acts in its own name and for its own account only in relations with the Management Company. The Reserve Fund represents the Management Company in relations with third parties.
The Pension Reserve Fund of the Republika Srpska (PREF) began operations in 2011 with assets of approximately 275 million KM. Upon its establishment, 100% of its assets consisted exclusively of shares of companies from the privatization process in the Republika Srpska. The initial portfolio consisted of shares in 770 companies (maximum ownership stake is 10%). These 770 companies include the most successful companies in Republika Srpska, such as telecommunications companies, companies from the electricity system of Republika Srpska (hydroelectric, thermal), then medium and small companies, but also over 200 companies that were in bankruptcy/liquidation proceedings at the time. The 100% owner of PREF is the State Pension Fund (first pillar) and the goal of PREF’s business is to pay a portion of the annual profit to the founder, who uses that money to pay pensions to all pensioners in the Republika Srpska. Therefore, PREF is a state reserve fund that manages assets that are in the process of privatization in the Republika Srpska (Bosnia and Herzegovina). Through subsequent recapitalizations, mostly based on new shares by the founders, the share capital of PREF as of 31.12.2023. year, amounts to 278,608,989 KM. In Bosnia and Herzegovina, until 2017, there were no mandatory and voluntary pension funds (second and third pillars). In Republika Srpska, the Law on Voluntary Pension Funds and Pension Plans was adopted in 2009, which was a prerequisite for the establishment of the first voluntary pension fund, whose work began in 2017 (www.epf.ba).
When PREF was established, the portfolio was characterized by the fact that most of the companies in the portfolio did not pay dividends, a third of the portfolio was in the bankruptcy or pre-bankruptcy phase, and the shares of most of the companies in the portfolio were illiquid on the stock exchange. Given that the goal of pension funds is a portfolio that is safe, profitable, liquid and diversified, the legacy portfolio needed to be modified and brought closer to the target framework. The result of our activities during the period 2011-2023 was an increase in liquidity, profitability, security and diversification of the portfolio.
Since the establishment of PREF (2011), a portfolio restructuring process has been underway. In the initial portfolio, 100% of assets were made up of corporate shares, and in previous years, shares of companies that generally do not pay dividends were sold on the stock exchange, and the cash inflows were used to invest in bonds, treasury bills and bank deposits.
The restructuring process so far has resulted in the fact that as of December 31, 2023, 47.41% of the portfolio value consists of domestic and foreign stocks (about 141.6 million KM), while 40.9% of assets consist of bonds and treasury bills (122.2 million KM). Of the total portfolio value, the value of Telekom Srpska shares accounts for around 18.15%, shares of ten companies from the electricity system of the Republika Srpska (three hydroelectric power plants, two thermal power plants and five electricity distribution companies) account for around 18.11% of the portfolio value, while the remaining assets in shares are shares of 82 companies (domestic and foreign). In addition to the shares of the listed companies, the PREF portfolio also includes shares of 139 companies that, according to international accounting standards, have no value because they are in the process of bankruptcy or are expected to be in bankruptcy. Investments abroad amount to 1% of the portfolio, consisting of shares of 8 issuers and one bond. The portfolio structure for one year is planned by taking into account the potential dividend payment to the Pension Fund of the Republic of Serbia and reducing liquidity risk on that basis.
In all the years of its operation, PREF has made a profit (an average of 8 million KM) and the founder has been paid a dividend every year (an average of 5.5 million KM per year).
Total revenues of PREF in 2023 amounted to approximately 11.7 million KM. The largest revenues of PREF are still from dividends of companies from the PREF portfolio (approximately 65%). The most profitable company from the PREF portfolio is Telekom Srpske, which paid 3.4 million KM to PREF in 2023, which accounts for almost 45% of all dividend revenues. Since PREF began investing in shares of issuers abroad in 2020, it generated dividend income of 299,533 KM (20 companies and 13 funds) from this portfolio in 2023. Over the past year, the majority of the portfolio abroad was sold, resulting in realized gains of 5.6 million KM.
The portfolio restructuring process brought interest income that had a growth trend until 2017, and in 2023 amounted to 4.1 million KM, or 35% of all regular income. More noticeable results in terms of returns from investments in bonds were achieved in the period 2011-2014, while in the period after that, a decline in returns on the aforementioned investments was noticeable, only to experience a slight increase again in 2023. Namely, the Banja Luka Stock Exchange trades bonds that citizens received as compensation for state debt based on savings that citizens lost in banks during the war (maturity is 5 years) and bonds that citizens received as compensation for damage they suffered during the war in Bosnia and Herzegovina (maturity is 15 years). In previous years, these bonds were traded at a significant discount on the Banja Luka Stock Exchange and PREF was one of the largest investors in these bonds. With the greater participation of banks, insurance companies and foreign funds in the purchase of these bonds on the Banja Luka Stock Exchange, the prices of these bonds had a growing trend with consequently lower yields.
Investment activities, as well as other activities carried out by the Management Company, led to a trend of increasing profitability of the PREF portfolio until the end of 2014, which can best be seen based on the trend of PREF income, and especially interest income. In the period 2015-2017, interest income continued to grow, while total income decreased, given the decline in dividend income, with the largest share of dividends from Telekom Srpska. However, in the last five years, it can be stated that the trend in PREF’s total operating income has stabilized, and that the continuity of the portfolio restructuring process has been maintained.
| 2013. | 2014. | 2015. | 2016. | 2017. | 2018. | 2019. | 2020. | 2021. | 2022. | 2023. | |
| Interest income (mil. KM) | 2,63 | 3,7 | 4,52 | 4,86 | 4,95 | 4,76 | 4,7 | 3,89 | 3,4 | 3,1 | 4,1 |
| Total operating income (million KM) | 15,28 | 15,90 | 15,16 | 11,31 | 11,93 | 10,71 | 10,34 | 10,16 | 11,7 | 11,1 | 11,7 |
The value of PREF’s assets has fluctuated from 320 million KM to 210 million KM since 2011. The reason for the decline in the value of assets compared to the initial value of assets in 2011 is the total recognized expenses of the bankrupt company, and the average decline in market share prices on the Banja Luka Stock Exchange (the share price index on the Banja Luka Stock Exchange fell by 39.66% in a ten-year period). The decline in the net asset value is also affected by the payment of dividends to the Pension Fund, when the fund suffers a large outflow in the short term. The volatility of the value of PREF’s assets increased in 2016, mostly due to the movement of market prices of shares with the largest share in the portfolio, and has not been present to that intensity since the establishment of PREF. Since 2019, there has been a constant trend of asset growth, and as of 31.12.2023, the value of PREF’s assets amounted to 298.7 million KM.
Further activities of the PREF Management Company are determined by the structure of the PREF portfolio, as well as market movements. According to the PREF Law and the current Investment Policy, the Company will continue to invest the majority of its free funds in less risky financial instruments, which have stable returns in the long term (bonds, treasury bills and deposits), bearing in mind that the long-term goal of the Reserve Fund is a portfolio structure in which debt securities will have a dominant share. In this way, it is possible to influence the stabilization of the value of the fund’s assets, which has been demonstrated in certain periods. In addition to the dominant conservative investment policy, the PREF Law and the PREF Investment Policy also provide for investments in riskier instruments.
In addition to portfolio restructuring activities, we pay significant attention to improving corporate governance in companies in the PREF portfolio. Our personal presence provides us with additional information about the operations of companies in our portfolio and represents a significant basis for our management activities. The total experience with over 3,113 general meetings since 2011 has enriched our corporate practice and highlighted the practical problems faced by companies in our portfolio. During 2023, 154 general meetings were held. The PREF team is committed to maintaining active participation in general meetings, as much as possible.