Mr. Sc. Nexhmedin Shaqiri- PhD CandidateMr. Sc. Nexhmedin Shaqiri- PhD Candidate ABSTRACT The aim of...

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JEAR; The world’s first multidisciplinary Open Access Journal and Conference 39

Financial analysis of the pension system in Kosovo and its

sustainability

Mr. Sc. Nexhmedin Shaqiri- PhD Candidate

ABSTRACT

The aim of this study is to undertake a financial analysis of the pension system in Kosovo

and its sustainability. It will serve governing bodies and management in making decisions related

to the operation of the Pension Funds. Analytical tools and techniques used in this financial

analysis will be financial reports and financial statements that enable their conversion into useful

relevant information for measuring the soundness of pension funds and their sustainability.

During the study financial reports will be analyzed which serve to measure financial adequacy;

liquidity, profitability, solvence and stability, financial relations between incomes (revenues)

and obligations to pensioners and to other parties. The primary objective of the study will be to

measure liquidity (statements of funds under management, cash flow, the stream of defined

pension contributions, investments and investment returns, the balance of success, income

statement, revenues from the Pension of Kosovo Pension Savings Trust, the total costs to the

pension system (fees and expenses)as well as the critical point of profitability; solvencity,

pension payments and financial stability, which represents the threshold of sustainability of the

pension system in Kosovo. The research question focuses on the impact of financial incomes to

the financial stability of the pension system in Kosovo. We will, therefore, try to present the

complete financial situation including the course of defined pension contributions, investment

returns and the total costs to the pension system. This study will use knowledge of the theories

on pensions in the various countries of the World dominated by the concept of a free market

economy, in particular multi pillar pension systems. Through critical evaluation made of the

pension system in Kosovo it will be shown that the pension system in Kosovo is stable itself.

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Possible findings will serve to make the necessary suggestions for completion,

improvement or change necessary to regulate the sustainability of the pension system in

Kosovo.

Key words; Pension system, pension contributions, analysis, financial flow, capital

adequacy, liquidity, profitability, solvencity, stability, sustainability threshold.

1. Financial Analysis of Pension Fund Trust Kosovo Pension Savings Trust (KPST)

The financial analysis is based on; purpose, method, reports, and financial statements, which

provide data accuracy, consistency, the involvement, of adequacy, comparability, etc. For the

preparation of financial analysis it will be necessary to collect, process and present accounting

information dealing with the Kosovo pension system. The process of financial analysis of the

Pension Fund of the Kosovo Pension Savings Trust (FP KPST) was developed using the

following accounting records : reports, financial statements, balance sheets, etc. Through

financial analysis it is aimed to evaluate the financial soundness1 and the influence of factors in

it. Values will be produced with reference to the soundness of the financial income based on the

quality of fllow fund size financial structure of funds, sources of funds, fullfill obligations or

towards other parties, the conditions of the general economic market of financial capital as well

as pension fund governance policies. The financial balance of the Pension Fund ensures

retention; liquidity, profitability, solvency and stability as factors determining the full

independence of the Pension Trust Fund Kosovo Pension Savings. The aim of the financial

analysis study is a reflection of the financial situation, the financial effects of assets under

1 Financial soundness estimation methods evaluated through pension funds, which may be:

a) methods of evaluation of the state of assets (value accounting, the value of the revised accounting and the value

of reproduction), b) the method of profitability (static methods of profitability, and dynamic method of

profitability), and c) other methods of estimation the value of pension funds (average value methods, methods of

Stuttgart, ekstrafitimit method, and the method of multiplication). According to these methods may appear the

success of pension funds (account of profit and success humbjes- balance drafted by the specification method of

Revenues and Expenses.)

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management compared with pension obligations to contributors to the loss. Economic objectives

of the pension system relate to factors affecting its stability, which are greatly affected by; total

financial income, the financial capital market, overheads and pension payments and annuities.

The purpose of the financial analysis is; evaluate the condition of financial income, the

assessment of developmental perspective, identify internal and external risks which may be

reflected in pension funds with a view to making qualitative decisions. The financial analysis

will also serve to rate it and identifys critical and sensitive points in the operation of Pension

Funds.

To make financial analysis is necessary to analyze financial outcomes;

a) Cash flow, b) Balance Sheet, c) Statement of income (income statement). Analyzing the

data will enable the interpretation of the financial reports used to make the financial analysis;

liquidity, profitability, solvency and stability, resulting from financial assets or management of

the activities of the Pension Fund.

Results of this analysis will reflect the financial condition of the Pension Fund and the need

for financial consolidation of the Pension Fund2, as a means to reduce the risk of rebuilding of

gross and net financial results3.

2 Financial consolidation can be calculated as follows:

Adding in more absolute net income = Net income increased - Net Profit before.

Adding a percentage of net income = Net Profit Increase in more absolute / Net Profit before.

Financial consolidation of pension funds has to do with; a) reduce the risk of implementation of the result business

and financial acceptable level, b) the elimination of hidden losses on balance sheet, c) placing the balance financial,

d) the construction of a afarimi such that enables the operations related pension annuity to be carried out by

private funds (without load with debts) and is financed from its own resources to cover the costs of management

operacioanle, e) ensuring real growth of net assets (own funds). 3 Financial results achieved by increasing the difference between regular income and expenditure derived variable,

within a period of time (time costs that charge period).

Reducing the risk of realization of financial results bruto- achieved by increasing the distance between regular

revenues and expenditures realized variable period, plus coverage of expenditures for interest and compensation

of using foreign funds.

Reducing the financial risk increases neto- achieved when the distance between regular income realized and all

expenditures listed earlier, plus coverage of public expenditure, taxation, etc.

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2. Objectives of the analysis

The basic goals of financial analysis of FP KPST are: a) liquidity, b) profitability, c)

solvency and d) stability.

2.1. Liquidity

Liquidity expresses the ability of the KPST Pension Fund to maintain positive cash flow

and meet immediate obligations. The degree of liquidity on the balance sheet based on the FP

KPST shows its financial situation within a specified period of time.

Careful management of liquidity risk means keeping cash in sufficient quantity, unable to

credit available through adequate instruments and ready for collection within the deadlines

specified time (for amounts receivable from third parties).

Short-term financial assets of KPST FP for short term periods ( up to 1 year) amounted to

115,664,403 euros, while financial liabilities amounted to 1,959,837 euros, so that the maturity

gap was 113,704,566 euros, while for medium-term period of 1-5 years gap maturity was an

amount of 39,654,216 euros. So revenues received for the reporting year continued to be

significantly higher than the monthly expenditures.

2.1.1. Status of funds under management

The Status of funds PF KPST under management in domestic sources in 2015 was 1,231.2

million €, which were invested or termed as follows: Investment in global financial markets

through investment funds 1,084.7 million €, invested in bonds in Kosovo € 89.6 mln, term

deposits with banks BKT and BPB € 6.0 million, the painvestuara CBK € 50.9 million, while

unallocated contributions were € 9,971,270,

Monies of FP KPST invested in 2015 were distributed as follows; share 64.8% in debt

instruments 37.5%, in the first class (cash money) 2.4% and net derivatives -2.7%.4

4 Annual Report 2015 Pension Fund Trust Kosovo Pension Savings

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While placement investments FP to KPST in 2015 were shared instruments of major

currencies, as follows: in USD 56.0%, EUR 27.0%, GBP 7.9%, JPY 1.6%, AUD 1.9%, DKK

1.6%, CAD 1.4%, CHF 1.2% and in other currencies 1.4%.

So the net increase in funds of FP KPST which were under management for 2015 were €

141,572,7305.

Investments The average

annual

allocation

Net assets

invested

Means in CBK

without

investment

Returns

from

investments

Allocation

in%

Total invested

assets

97.45% €1,180.4

mln

2.55% €28.39 mln 100.0%

Fig. No.1. The statement of net assets invested in financial and capital market returns to

their realization6.

Net assets under management of KPST FP versus annual GDP were 21.6% Kosovo.

2011 2012 2013 2014 2015

Net assets

under

manageme

nt

€588,169,206 €739,753,94

0

€913,182,73

8

€1,087,760,5

98

€1,229,333,32

8

Kosovo's

GDP

€4,814,502,0

11

€5,058,802,

012

€5,326,602,0

13

€5,567,500,0

00

€5,697,500,00

0 ‡

Net assets

versus

GDP

12.2% 14.6% 17.1% 19.5% 21.6%

Fig. No.2. The statement of net assets under management of KPST FP versus annual GDP of

Kosovo during the period 2011-20157.




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2.1.2. Cash flow

Flow statement of Cash (cash flow) reflects operating activities, investing activities,

financing activities (payment savings pension contributions, investment funds Chat pension

funds, expences overall and withdrawals of funds on behalf of retaliation pension annuities, ie

pension8.

Cash flow theory9explains that the greater the investment assets, the more control should be

set free to achieve profitable activities in the interest of Pension Funds.

As a result of financial analysis there can be built an analysis perspective, which represents

the forecast of the cash flow, liquidity and profitability expected, which can be used for the

evaluation of the Pension System, ie pension funds in Kosovo.

Therefore, pension funds have a duty to maintain the quantity and value of money (to

increase the amount of assets under their control and to make decisions cautiously regarding

their governance).

The importance of cash flow lies in mapping the historical and present movement of money

in order for investors to make informed decisions about investment measured by reducing the

degree of investment risk. So the selection of the investment policy of optimal profit will affect

profits and reduce risk10

.

Analysis of cash flow - The purpose of the cash flow report is the recognition of actions

between inputs and outputs of the KPST FP money. The statement describes the results of cash

flow for operating activities, investing and financing activities of KPST FP during a certain

period. So flow analysis Cash explains cash flow in the KPST FP balance during a certain

period of time.

8 Myers & Majluf, the flow of money (cash flow) serves techniques to create scale construction necessary liquidity

and facilities necessary for to undertake investments in the future (ie investments in liquidity seen as an

opportunity for the creation of value net positive of returns) diminishing as more debts. 9 The free flow of money by Jensen (1986), suggests that the greater the assets investment and more should be put

for control of assets free, to realize profitable activities in the interest of holders of financial assets, ie interest

holders of shares. 10

Pecking Order Theory, according to which investors finance their investments primarily from retained earnings,

then debt and finally secure debt through risky.

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a) Operating activities - The present cash flows from operating activities of the KPST

constitutes FP activities related to transactions and events which affect the determination of net

income.

b) Investment activities - The present cash flows from investing activities.

2.1.2.1. Stream of defined contribution pension

The amount of contributions received for 2015 in FP to KPST was € 137,519,615, while the

number of active contributors in 2015 was 297.466 (271.347 employees, self employed and

4,271te 30.390 employees and self-employed).

Contributions received from the foundation up to 2015 were € 1,110,907,262, while the

number of accountholders in 2015 were 507.963 (the number of new accounts opened during

2015 were 31.404)11

. So, under the management of PF contributions of KPST in 2015 were

84.3%.

Years Contributions received Contributions under management

2002-

2011

€612.6 mln €587.8 mln

2012 €113.0 mln €101.9 mln

2013 €119.1 mln €108.0 mln

2014 €128.7 mln €115.3 mln

2015 €137.5 mln €121.4 mln

Total €1,110.9 mln €1,034.4 mln

Fig. No.3. Statement of contributions received and under management during the period

2002-2015.

11

All data and analyzes presented as; net or gross assets under management, the contributions for the year,

changes in assets under management; They do not include contributions receivable in the amount of € 8.76

million.

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2.1.2.2. Investments and investment returns

The investment policy of the FP of KPST is based on; a) the distribution of investment

funds asset class (financial instruments and those in direct investment within the investment

funds) and b) the investment strategy adopted by investment funds.

Principes of investment funds in KPST are to FP; security of pension savings, investment

diversity, maximizing returns for the level of risk undertaken and maintenance of adequate

liquidity.

FP to KPST investments aim to minimize investment risk through risk management, in order

to be realized as higher returns.

In 2015 FP KPST had € 1,231.2 million assets under management, while the share price at

year-end 2015 was € 1.3171. The increase of the share price during 2015 was 2.3% while in

2014 it was 6.3%.

Fig, No.4. Graph of the unit share price of KPST founding teFP 2002-2015

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2.1.3. The balance of success (income statement)

The income statement presents financial activities of revenues arising from pension

contributions and investment, by reducing management and operational costs of the Pension

Fund. The status of the Pension Funds sustainability is reflected through the balance of the

success, which represents the increase or depreciation of assets.

So the Balance12

of Pension Funds success reflects the ratio of revenues and expenditures, to

summarize the outcome of Pension Funds business.

2.1.4. KPST (Pension funds) revenues

In 2015 FP gross assets under management of KPST were € 1,240,051,569 which generated

revenues of € 29,554,784, while expenditures was 5,819,478 €, and this resulted in an increase

of net cash of participants of € 23,735,306.Net cash flow from investing activities was €

102,066,051, net cash flow from financing activities 119,338,808 € (participants contributions

received € 137,519,615 (€ -17,786,861 savings withdrawals, Refunds € -393.946), while the

share price had marked growth of 27.5%.

Gross income consists of investment returns, ie financial instruments13

, namely interest

realized from deposits on an accrual basis.

12

Balance presents the summary of financial positions of FP for a certain period of time. 13

Financial instruments are financial assets and liabilities, which include; investments, money,

cash equivalents, receivables and liabilities or equity. Interest, gains and losses relating to financial instruments

classified as assets or liabilities are reported as net income. Financial instruments are deducted by the decision of

whether the FP KPST aims to achieve settlement, either on a net basis whether to implement a tool and at the

same time to repay the debt.

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Fig. Nr. 5. Graph of annual price growth of action during the period 2011-2015.

2.1.5. The total costs to the pension system (fees and expenses)

Fees charged for 2015 were 5,819,478 € (investment expenditure14

for 2015 was 4,442,773 €

or 77.6%, operating expenses were 1,282,483 € or 22.4% of total expenditures FP to KPST and

management costs were € 94.222).

Investment fees to the FP 2015 to KPST were 0.40% of invested assets15

, while operating

rates were 0.085% of assets under management and management fee expenses were 0,13%.

14

Investment costs include: fees that fund managers to hold assets investment and access to the financial markets;

CBK fees for the transfer of funds; and other costs such as brokers and custodians of funds. 15

Funds investing in financial markets charge on average about 1% fund management, and KPST has managed

through individual agreements and Selection measured to ensure that the fees paid to investment funds through

which invests pension assets, expected to be average about 0.40% of assets.

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Fig. No.6. Graph traifs shows charged annual fees and rates during the period 2011-2015

Investment funds of the Pension Fund KPST charge fees for investment management tools

depending on which offer investment products and hold the position in the market.

2015 2014

Total fees to fund open €4,423,748 €3,039,313

Fees CBK and other transfers €9,138 €53,244

Brokers, custodians and guarantees €9,887 €11,487

Total investment costs €4,442,773 €3,104,044

Fig. No.7. Management fees from investment funds and investment costs

So, self-sustainability of the pension funds based on savings and pension contributions,

conditioned by their profitability16

and liquidity17

of their ability to establish balance between the

duration of the operations to be financed and the duration of the corresponding sources of

financing.

16

Profitability of pension funds, which are based on savings and pension contributions, reflects the relationship

between financial revenues and total expenditures (the ability of pension funds to create financial returns from

investments, at a height of rate of return, which enables coverage total expenses net of capitalisations). 17

The liquidity of a pension fund refers to his ability to repay current liabilities as they become due, from funding

sources accumulated earlier or same duration.

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2.2. Profitability

Profitability is the express ability to KPST Pension Funds to create sustainable income in

the short term . Profitability of KPST Pension Fund is based on the income statement, which

reflect the results of operations within a period of time.

Factors that affect the rate of the profitability of Pension Funds are: the size of the pension

funds, property funds finances, the concentration of market investments (orientation of

investment areas investment products, investment, etc.), rate of return, the performance of the

asset manager of the investment costs of the Pension Fund, the efficiency of government and

management (investment policies)18

, etc.

Net pension assets of KPST Pension Fund for the last five years (2010-2015) have increased

by 151.6%, while the gross investment return for the last five years (2010-2015) was € 224.9

million. Returns from investments for 201519

were € 29,554,784. (Returns from the investment

interest for 2015 were in the amount of € 28,389,646, while the other returns were an amount of

€ 1,165,138), so that profits in 2015 were 15.7%.

In 2015 the net return for the year was 2.3% and assets under management increased by

13.0%., In 2014 the net return for the year was 6.3% and assets under management rose to

19.0%. In 2013 The net return for the year was 8.5 %, and assets under management increased

by 23.4%.whilst the cash and cash equivalents at end of year was 50,906,018 € (increase /

(decrease) in cash and cash equivalents of 40,967,800 €, cash and cash equivalents at beginning

of the year 9,938,218 €).

Revaluation gains and interest from investments in 2015 was 22,456,273 euros, while fees

charged on the accounts of participants totalled 957.238 euro, so the increase in net assets of the

participants was 23,413,511 euros.

18

Management efficiency becomes making the comparison of current management by the previous management,

or management of institutions very similar in the same period of operation. 19

Gross return on investments in 2015 was € 28.4 million, or net return of € 23.7 million resulting after deduction

of investment and operational fees charged on KPST Pension Fund.

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So there was a measure profitability of the effects of asset management in relation to the

obligations of the Pension Fund.

2.3. Solvency

Solvency is the solvency of the P to KPST paid the contributors and other third parties in the

long term.

2.3.1. Pensions

The number of accounts at KPST P (traction) the foundation in 2015 was 28.981. New

account with withdrawals of savings for 2015 were 4.438. The value of the withdrawn funds for

2015 were € 19,299,443.

The value of funds withdrawn since the founding up to 2015 was € 72,524,248. Withdrawn

values have steadily increased as a result of: a) higher number of accounts with withdrawal; b)

positive return on investment of 2.23%; and c) new contributions allocated through the account.

Total financial assets of KPST Pension Fund in 2015 were 1,234,729,122 euros, while total

short-term liabilities were 443.707 euros.

The number of people attracting pension assets during 2015 were: persons who had reached

the retirement age of 65 :e 3.468 or 78.1%, disabled persons: 182 or 4.1% and persons who

withdrew their savings and heirs of contributors who died before they could withdraw their

funds from KPSF: 786 cases or 17.7%.

Table on withdrawals

Years Contributions Assets

2004-2010 €14.1 mln €13.8 mln

2011 €5.7 mln €5.7 mln

2012 €8.4 mln €8.7 mln

2013 €9.7 mln €10.7 mln

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2014 €12.3 mln €14.3 mln

2015 €15.8 mln €19.3 mln

Total €66.0 mln €72.5 mln

Fig. No.8. Statement of contributions and assets of pension annuities terhequraper penalty

during the period 2004- 2015

2.4. Financial stability

The financial stability of the PF to expresses the KPST ability to remain as a financial fund

in the long term, with no significant loss or deficit during its operation. The financial stability

rating of PF of the KPST is based on the income statement and balance sheet, as well as other

financial and non-financial indicators .

Financial stability is also measured by the degree of financial risk management and indirect

exposure of investments through funds of PF to KPST.

In 2015, the bulk of the PF to KPST assets were invested through open investment

instruments which were marketed in different asset classes using different investment policies

and risk. As a result, the PF of the KPST funds were exposed to different risks for direct

investments, depending on the assets invested in open investment instruments. When analyzing

all direct and indirect investments, it can be seen that the degree of exposure to the PF of the

KPST assets, as a result of currency risk by their participation in the total currency was: USD

56.0%; EUR 27.0%; GBP 7.9%; JPY 1.6%; AUD 1.9%; DKK 1.6%; CAD 1.4%; CHF 1.2%;

other 1.4%.

Also the risk of direct and indirect investments can be evaluated according to their

distribution asset classes, which in 2015 were as follows: 60.9% shares; Treasury debt 23.2%;

12.0% corporate debt; Cash 6.4%; Net derivatives -2.5%. The analysis shows that in the pension

fund assets of KPST in 2015 there was no direct exposure to currency risk although sensitivity

analyzes were not conducted to measure the effect of changes in foreign currency in total

revenue.

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Interest rates also affect the financial stability of KPST FP, which express the real value of

the future cash flow to invest in financial instruments, and these vary due to changes in market

interest rates. In 2015 the funds invested directly (instruments held to maturity with fixed interest

rate) and the Pension Fund KPST had no variable interest rate, therefore it was not exposed to

investment risk due to variations in interest rates.

Credit Risk can be calculated as a factor of financial stability . Based on the annual report

for 2015 of the Pension Fund of KPST20

it shows that risk credit of the pension fund assets were

a very low investment, given the diversification of very large emitters and the evaluation of

debt instruments in the composition of open investment instruments .

Another factor that determines the stability of the financial income are the prices of

investment instruments, which in 2015 had marked a small decrease , their impact was sensitive

to the change in the value of direct investment instruments started. This type of risk continues to

be the most important risk factor directly related to the assets invested by the Pension Fund

KPST. It is, therefore, necessary that this risk be managed much better through an investment

policy, by distributing investments in instruments for open investment without corelation with

each other (investment portfolios have different classes of financial instruments and approaches

and different investment objectives).

An illustration of the sensitivity to change in the price of open investment instruments is

shown by the price of open instruments being 5% higher, respectively lower in 2015 Thus the

net assets of the participants in the Pension Fund KPST will increase by an amount of

66,532,108 euros, or decrease by an amount of 66,532,109 euros.

The sensitivity analysis to changes in the price of shares in the open within the instruments

of financial assets of the KPST Pension Fund was 749,998,176 euros, or 66.7% of assets of

KPSF.

The price risk of shares in the portfolios of instruments for the Open is much lower than the

risk associated with the direct price of its Open instruments , as the impact of growth, namely the

20

Credit risk is the risk of financial loss to the value of pension fund assets to KPST, resulting from non-fulfillment

of contractual obligations to a client or other party.

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reduction of 5% in the price of shares in such investments would cause the net assets of the

participants to grow

37,504,629 euros, or 37,495,189 euros fall.

So, financial stability is a condition of the KPST Pension Fund as a result of ; the amount of

savings collected from pension contributions, the amount of money collected in the pension

fund, investment income and contributions (investment returns from foreign exchange, interest

rates, prices, credits, etc.).

3. Conclusions

The performance of the KPST Pension Fund is measured in absolute terms through the net,

which is evaluated as good and tends to increase, while other indicators qualitatively assess the

effectiveness of the pension system.

The effectiveness indicators are generally higher as a result of increased rate of returns in

relation to costs.

Literature:

1. Fridson, Martin and Fernando Alvarez, Financial Statement Analysis: A Practitioner’s

Guide. Green, Robert, “Using Correlation Analysis in Determining Proper Method to Project

Earnings”, The Valuation Examiner, 1st qtr, 1994.

2. Helfert, Erich A., Techniques of Financial Analysis, Chapter 1, Part III (The Nature of

Financial Statements), and Chapter 3 (Assessment of Business Performance – Ratio Analysis and

Performance)

3. Hitchner, James R., Financial Valuation Applications and Models, Chapter 3 (Financial

Statement and Company Risk Analysis).

4. Horngren Charles, HarrisonWalter, Smith Bamber Linda. (2002) “Accounting’, Fifth

Edition.

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5. Lewis, Richard & Pendrill David. (2004) “Advanced Financial Accounting”, Seventh

edition.

6. Kosovo Accounting Standards. (2011) - MRS. Prishtina.

7. International Accounting Standards. (2011) - IAS / IAS.

8. International Financial Reporting Standards (2011) - IFRS / IFRS. MRS. (2008)

9. Markowitz, H.M. (1952) Portfolio Selection, The Journal of Finance, 7(1), 77-91

Markowitz, Harry M. (1952) Portfolio Selection.

10. Modigliani, F. and Miller, M.H. (1959). The Cost of Capital, Corporate Finance

and the Theory of Investment, American Economic Survey, 48, 261-297.

11. The annual report for 2015 by the Pension Fund KPST

12. www.trusti.org

Mr. Sc. Nexhmedin Shaqiri- PhD CandidateMr. Sc. Nexhmedin Shaqiri- PhD Candidate ABSTRACT The aim of...

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