The FINANCIAL — Have you ever thought about what you are going to do when you retire in your sixties? Are you concerned about how low the state pension is after retirement and wish you could receive a form of steady income even after retirement? In this article we offer general advice on how to get a rate of return or return on investment (ROI) after retirement leaving you free from worrying about your financial state.
We have evaluated three forms of providing steady income after retirement including pension funds, investment in real estate and investment in stocks.
The total number of individuals who have opened pension funds in Georgia is 18,184. From which the majority are at GPIH, counting more than 10,000 members. There are 8,156 members at Aldagi BCI while the remaining 38 individuals are registered at Imedi L International.
Aldagi BCI has only one type of pension fund, a pension defined by contribution. Any individual over the minimum age of 18 can join a private pension fund and then periodically make monthly contributions to the fund until reaching the age of retirement. The contribution amount is defined by the financial means of the individual. A contribution might be conducted in several ways: by the participant, by the deposit holder to the profit of the participant, by an employer to the profit of the participant, or together by the participant, deposit holder and employer.
“The fund created through insurance contributions is invested in different class activities. The profit amount of investment depends on the profit generated by the investment activities conducted by the Pension fund. The agreement formed between the founder of the pension fund and participant of the scheme is long term, before the savings are exhausted,” said Maiko Ivchenko, Head of the PR Division at Insurance Company Aldagi BCI.
“According to the law of Georgia on non-state pension insurance and guarantee, the participant of a scheme should be full age. After the individual decides to form cooperation with a pension fund there are several steps before forming an agreement. The individual presents their ID card, a non-state pension application form is filled out and an agreement is formed, due to which the individual becomes a member of an Aldagi BCI private pension fund,” Ivchenko explained.
The scheme offered by GPIH implies a defined contribution model, which means the amount of periodic payment is defined when the account is opened for the new member. There is no fixed minimum amount for periodic and for initial contributions. No fines are considered if the payments are irregular, or are not conducted in a timely manner. Payments can be made easily, periodically straight from a bank account, or in GPIH branches and representative offices. The individual account can be monitored online, via the GPIH website.
“It’s totally free to open a pension account at GPIH. The offer is considered open to individual as well as corporate clients. As the member reaches retirement age, he/she has the option to obtain the savings as a lump sum, or as periodic instalments over a defined period or for the rest of their lifetime,” said Natia Peradze, Head of the Pension Insurance Project.
“One can also transfer the accumulated amount from another company’s pension fund without any charge. Withdrawal of the accumulated amount from the account is also unlimited, free from any type of fines and charges,” Peradze added.
According to Peradze, pension assets (acquired amount) are invested in various diversified ways: treasury liabilities, large-scale investment projects, bank deposits, corporate bonds, real estate, etc. Investment income will be distributed among individual accounts annually, considering the average amount on the account throughout the year. The only commission charged is an asset management fee, which totals the specific percentile of accumulated investment income.
According to the figures of the last quarter (31/03/2011), the total value of pension funds at Imedi L International equals approximately 150,000 USD.
“The initial contribution to our pension fund can be 10 GEL, USD or EUR, moreover we provide maximum 11% RO1 (annually) to our individual beneficiaries,” said Teona Goderidze, PR Manager at Imedi L International.
The sole criterion to open a pension fund at Imedi L International is that the individual should be below the state pension age (60 for women and 65 for men respectively). Terms and conditions depend on the type of chosen scheme.
There are 2 main types of pension insurance at Imedi L: Permanent pension which is paid to the insured from the beginning of the insurance reimbursement pension until his death. The second one is a pension period defined which is given to the insured from the beginning of the repayment of pension insurance for a period of time (less than 5 years).
“A private pension fund is one of the riskless ways of saving money. The agreement of pension insurance is long-term cooperation between the scheme founder and participant. Due to this fact funds’ assets are diversified in low-risk and high-profitable obligations. The essence of a pension fund is to guarantee untroubled remoteness,” said Ivchenko.
According to Ivchenko, ROI depends on received profit due to investment activities of the pension fund. According to active law non-state pension funds are diversified into different types of obligations, namely high interest rate long term deposits, obligations, different stocks of organization and so on.
“According to the previous year’s statistics, Individual ROI on GPIH pension funds was higher than on bank accounts. Several bank deposits limit withdrawal of an amount from the account, which is not limited in GPIH pension accounts’ case. A pension account is a long-term, safe deposit,” said Peradze. The ROI at GPIH is 13%.
The Georgian Stock market is in an early stage of its development, as well as the companies in the emerging Georgian market. Only when companies start to mature and grow in volumes when debt loan will not be needed, then entities will start issuing stocks and providing dividends.
“The Georgian Stock Exchange index rose by 63% y/y last year, BG Index gained 139% y/y. The Georgian Stock Market is in the early stage of development, but there are a few investment opportunities which might be highly profitable in the medium/long term. Bank of Georgia is one of the top picks, shares gained 146% in 2010. Also, Liberty Bank, Caucasus Energy and Infrastructure, and Teliani Valley shares are trading on the local market,” said George Shengelia, Associate at BG Capital.
“It’s important to diversify your portfolio,” advised Shengelia. “A well diversified portfolio can provide stable return but there are still certain risks. When an individual decides to invest his/her savings in securities, it is very important to get professional advice. Based on the client’s risk appetite, the advisor can give recommendations about which securities to invest,” Shengelia added.
Real Estate Market
The real estate in Batumi is most in demand as it is a highly invested-in city, with the highest Return on Investment (ROI) in Georgia according to real estate brokerage companies. Tbilisi like other Georgian cities is experiencing serious problems. Almost all constructions here are frozen.
“Tbilisi and Black Sea coastal cities like Batumi, Kobuleti and Ureki remain the most popular among investors and are expected to anticipate the highest ROI in the future,” said Nikoloz Urushadze, General Director of Paragon Ltd, Real Estate Valuation and Consulting.
As Mr. Urushadze stated 10 years is too long a period for Real Estate projections to predict ROI. However for the next two years he expects real estate prices to grow slowly. “The year 2013 will be very important due to the elections. Stable elections will determine future prospects,” Urushadze stated.
“If the economy continues to grow at the current rate, it is expected that Georgia will at least reach East European level in the next 5 to 10 years. The ROI will be lower as the economy develops and risks go down. However, the prices are expected to go up,” Urushadze said.
Urushadze said that Paragon does not recommend its clients to sell in the current situation but instead to invest as it appears that the country is coming out of the recession and prices of real estate are at their lowest in the last 3 years.