From their viewpoint, it was a matter of justice and inevitability. Kosovo’s February 17 declaration of independence was greeted with euphoria among the vast majority of the local population, recognition from most Western powers and strident condemnation from Serbia, Russia and Spain. But according to Vershim Hatipi, deputy director of the blossoming defined contribution €278m Kosovo Pension Savings Trust (KPST), it is business as usual.

He says of the countries that did not support their independence: “In a word, no, we don’t really care right now. We have the backing of democratic countries and that is fine with us. We have other things to worry about.”

Perhaps the fund’s biggest problem right now is its returns. In 2007, the fund’s assets appreciated by 1.7 per cent net of fees, a figure Mr Hatipi described as “very weak”. However, the fund is receiving about €5m a month in contributions, which should keep growth stable. In 2006, its assets under management were €215m, meaning that in one year it has grown by €63m, something that should be encouraging to its 253,000 members and 4,000 retirees.

KPST’s asset allocation reflects the challenges it faces. For example, it has no domestic assets as the Kosovar market is considered to be too young and undeveloped. With no domestic stock exchange and an economy that operates in the euro despite not being members of the EU, it is not very difficult to see why KPST holds this view.

Its investment universe is also relatively limited, but is admirably and justifiably aggressive for such a young scheme. At the moment, 60 per cent of its assets are invested in equity, 5 per cent in foreign exchanges, 1 per cent in cash and the remaining 34 per cent in bonds.

KPST has two mandates with ABN Amro’s interest growth fund and global liquidity fund and another portion invested in Vanguard’s global stock index fund. It also has an allocation with Schroders’ international selection fund. The currency mandates are run by Auriel and FX concepts, while ECM has another mandate in bonds.

The fund would like to diversify, but at the moment there are restrictions in place that will make this difficult in the short term. However, Mr Hatipi says it is actively seeking to diversify and would eventually like to make some domestic investments, partially out of a sense of pride.

He says: “The board is constantly looking to diversify even further, but right now we’d probably have to do it through index funds, mutual funds or third parties.”

The fund’s board is set to change to this year. The three-year contracts for the seven-member board are about to expire. A few of the trustees, such as Xafinity consultant Harvey Kember, have expressed interest in returning, but as many as three new names could grace the board once the tenders have been awarded.

Under the regulations, at least four of the members need to have 10 years or more experience in administering pension funds. One member must be an employee representative and another must represent the employers. Ultimately, the decision-making process on a new board is out of the fund’s hands. The Central Bank of Kosovo, the auditor general and ministry of finance will make the final call.

The new board will also be responsible for upgrading the fund’s IT system, for which it has recently put out a tender. KPST currently offers its members only one default option. The hope is that a new IT system will make it easier to maintain contribution accounts and give members more investment options. Both Mr Hatipi and Mr Kember recognise that members have differing risk profiles and said there could be as many as three options in the near future.

Much of the scheme’s asset diversification efforts will be dependent upon how well the fund’s internal workings evolve. The fund hopes that the new IT system will allow it to invest in some more exotic asset classes, but any move into alternatives is at least a year away.

For 2008, KPST has set a more ambitious return goal of 5 per cent to 7 per cent. This would be a substantial improvement over last year’s 1.7 per cent figure and should be a significant challenge given the way global markets have begun the year.

Mr Kember says: “The public’s understanding of the fund is generally pretty low, but it is a relatively sophisticated economy. They’ve done well with this fund.”

He adds that the fund’s governance is top notch, and he has great confidence in their appointed asset managers. While Mr Kember acknowledges that the markets have been difficult, he says that there are no significant changes planned for the short term, emphasising that they are comfortable with their risks and investment decisions. First quarter results are expected to be published this month.

Another main challenge will be political. Kosovo needs to establish itself and develop its economy – no small order for a young and controversial country. Once this happens, the fund would like to make some domestic investments and give its members the option of a fund with interests in Kosovo. However, this is something that will take considerable time and effort.

But two of the main challenges expressed by officials, who prefer to remain anonymous, have been corruption and political interference. For now, the government has steered clear of getting overly involved within the development of the fund, but with recent independence and a new board about to be appointed, there are worries that some politicians could pay a little too much attention to how much KPST has under management. The overall feeling, however, is that the fund’s independence will be retained and it will grow alongside that of the country.

• Location: Pristina, Kosovo
• Members: 253,000
• Assets: €278m

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