Retirement plans hit by coronavirus uncertainty

Latvian retirement funds are likely to be hit by the market uncertainty caused by the novel coronavirus, reported LSM's Russian-language service March 15.

About 324,000 people in Latvia have investments in the voluntary third-tier pension pillar and life-insurance schemes. These are often tied to global stock markets, which are currently seeing massive fluctuation.

Latvian stock markets haven't been hit as hard yet. OMX Rīga is down monthly by 11.4% reaching the level of 2017. In comparison the OMX Baltic Benchmark index is down 22%, also reaching the level of 2017. The latter index reflects the stock prices of the biggest Baltic companies. The decrease is smaller than elsewhere in Europe, but as journalist Sergejs Pavlovs argues, it is not caused by local economic resilience but instead by low trading volumes. 

Local stocks are usually traded by private individuals as opposed to finance companies, and therefore changes in the global market arrive in the Baltic region after a considerable delay. INVL Asset Management head Andrejs Martinovs confirmed this to LSM: "Our market is small, and even if funds have investments here, these are not great, and so fund managers choose to sell them off the very last."

The biggest loser in the Baltic stock market thus far is the Lithuanian tour operator Novaturas (–41%), while Latvian companies have suffered less. SAF Tehnika's shares are down 28%; Valmiera Glass is down 26% (the same as Tallink, the Estonian ferry operator); Latvijas balzams is down 24% and Olainfarm 19%. 

The largest decrease was recorded last Thursday when trading had to be stopped for a time. But at least part of the fall was offset on Friday. 

airBaltic obligations emitted last year are trading at 86% of the nominal value, down from 104% just a few weeks ago. This does not reflect the rock bottom as some obligation holders are willing to sell at just 75% of the nominal value. Some companies choose to buy off their own obligations in situations like these, but airBaltic did not offer comment whether the company is willing to do so at this time.

The third pension pillar is popular way to invest among Latvian residents. It is also incentivized as investors are eligible for income tax rebates. This pension level is strongly tied to the global stock market, unless one has invested in a conservative plan. In late 2019, 166,000 people had chosen to invest in an active pension plan, meaning it is made up by stocks in the area of 50% to 100%. Currently there is no data over the way the value of these plans has decreased in March. 

Experts usually suggest to continue planned payments regardless of the market situation. But it is probable stock values will continue to decrease.

"It's a time of great instability," said Andrejs Martinovs. "It's an unprecedented situation across the market, or perhaps the previous precedents are decades old. For example, I've been observing the market since 1997 but I don't ever recall the German DAX index falling 10% in a day. [...] I think the market will find a reason to put more conservative estimates on stock values, and we're likely to see new decreases."

Former Olainfarm board member and current private investor Salvis Lapiņš shared this opinion. "The virus is far from plateauing, the number of cases continues to grow. The consequences are difficult to predict. We are now seeing that Italy, a developed country, is close to paralyzed by the virus. And it hasn't really reached the US as of now. They say that the virus is to subside with warm weather, just like the flu. But I think this is still far-off if warm weather doesn't set in, accompanied by a steep decrease in the number of cases. [..] As the English say, it's bound to get worse before it gets better." 

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