The value of the 2nd pension pillar plans managed in Latvia is estimated in euros, which is the national currency in Latvia. The old age pension is also being paid in euros. But did you know that the most popular investment plans in Latvia, investing up to 50% of assets in capital securities and other financial instruments of equivalent risk level, actually are investing in foreign currency in up to 50% cases, for example, the USD denominated financial instruments? So, we thought it is time to review in detail, whether and how the currency exchange rate fluctuations affect your 2nd pension pillar savings.

What happens to your savings if the foreign currency loses value against EUR?

A good example becoming popular among the asset managers is the iShares Core S&P 500 ETF EUR (Acc) exchange traded index fund, in which about 40 million EUR of funds of comparable (50% active ones) pension plans are invested. The 6-month return of the fund expressed in USD currency is +6.5%, which approximately corresponds to the increase of S&P 500 index value. However, in pension plans the shares of this fund are valued in EUR and the actual return reflected in the 2nd pension pillar plan is only +2.1%. how come? That’s simple: the increase of EURUSD currency exchange rate or drop of USD value against EUR had a negative impact on the yield and has decreased the value of the fund investment expressed in EUR by -4.4% against the said USD index.

In its management of pension assets, Signet Pensiju Pārvalde IPAS is also using investments into the world’s biggest capital market in the U.S. through S&P 500 index funds, however for risk mitigation it chooses the investments in the index funds that also provide currency exchange risk hedging. This means that if the drop in USD currency has negative impact on the EUR investment value, as mentioned above, then the hedged currency position excludes the negative drop and ensure better yield, expressed in EUR.

Here is an example, how the Signet Active Plan was performing over the last three years split by periods in comparison to the changes in the EUR exchange rate and the average performance of other 50% active investment plans. It should be noted that despite the negative EUR Value fluctuations over the last three years, Signet Active plan has still managed to ensure the highest annual average return.

What happens to your savings if EUR loses value against foreign currencies?

As long as the currency of your savings and also your expenses is basically EUR, the negative fluctuations of EUR against USD will have no major impact on your real purchasing power, except the higher prices on imported goods. At the same time the drop in EUR value also has a positive impact on the overall European economic activity, since it contributes to improved competitiveness of manufacturers, which in long-term may facilitate the growth of the European capital market as well, including the pension plan investments in the European financial markets.

In what currency should one make their savings?

For each employee, the case will be individual with all the factors affecting the choice of currency for the savings. However more often than not, those who are not into managing assets professionally are recommended to make savings in the currency, in which they plan to have their future expenses, credit obligations, etc. This way, regardless of the currency rate fluctuations, the currencies of the income and expense remain in balance and do not cause a major currency risk. Signet Pensiju Pārvalde IPAS also believes that usually investments without currency risk are more suitable, therefore under their investment policy they usually use the financial instruments denominated in EUR or other currencies, but EUR hedged ones.EUR hedged) finanšu instrumentus.

When would the Signet Active Plan be suitable for you?

In our opinion, the Signet Active Plan would be a good choice in the following cases:

• If you plan to spend your retirement mostly in Europe and the European Economic Area;
• If your expenses in retirement will mainly be in EUR currency;
• If you would like to protect your pension savings against the adverse fluctuations of currencies that are not EUR.

In what cases it would be suitable to make pension savings with a substantial foreign currency position?

There may be certain cases when pension plans with a substantial foreign currency position would be suitable for making your pension savings. For example:

• If you are planning to spend your retirement outside Europe, for example, in the U.S., in which case your expenses will be in USD, so it could be useful to choose a pension plan with a higher share of investments in the U.S. markets without the currency risk hedging;
• If you believe that the foreign currency risks will grow significantly in value against EUR, and you are fully aware of the currency-related risk and their impact on your savings.

If you want to change your pension savings manager and join the Signet Active Plan, go to www.latvija.lv and choose a service called“Selection or change of the investment plan for 2nd pension pillar”.