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Who will be allowed to dispose of pension savings in Kazakhstan? What can be done with these savings?

The National Bank introduced a new model of pension fund management, which provides for the transfer of a portion of UAPF funds to the competitive environment. According to this model, only those with highly sufficient pension savings will have the option of alternative investment, writes
Who will be allowed to dispose of pension savings in Kazakhstan? What can be done with these savings?

The concept of the bill amending several laws on pension provision and the financial market was published on the e-government website on July 31. The document lists advantages of UAPF establishing: from the moment of the transfer of pension assets to the National Bank, their accumulated yield minus inflation is 10%; the activities of pension agents and migration of depositors are excluded; administrative expenses are reduced; the commission on investment income and pension assets is reduced by 3 times.

The document says that the current model of pension asset management has several drawbacks: there is no competitive market for managing pension money in the interests of depositors, depositors do not have the right to choose a management company, and the population is not interested in planning their pension payments.

What is being reformed?

In order to eliminate these shortcomings, the National Bank proposes to open the market for private (both local and foreign) pension asset management companies (PAMCs) and allow citizens to transfer a part of their pension savings that exceed the “sufficiency threshold” to PAMCs.

“As “the sufficiency threshold ”, we consider the amount necessary to conclude a pension annuity agreement with an insurance company on making life-long insurance payments upon reaching retirement age (set for each year: for women in 2019 it is over 10.1 million tenge, for men - over 8.2 million tenge),” the concept explains.

The amount below the threshold will remain in the UAPF.

According to the National Bank, this approach will allow large investors to exercise their right to choose the most effective investment strategies. Due to a more aggressive investment policy, the PAMC profitability will be higher than the current profitability of the UAPF.

“Thus, it is assumed that upon reaching the retirement age, depositors will have more savings, which positively affects the size of pension payments,” the document says.

The depositor’s pension savings will be returned to the UAPF upon reaching retirement age.

As for the requirements for the PAMCs, the regulation within the limits of legislation for securities market participants will apply to them. The activities of the PAMCs will be licensed. A list of financial instruments which PAMCs will be able to invest pension assets in will be determined. The requirements for equity adequacy as well as prudential standards to ensure minimum returns will be established. If it is not provided, the PAMCs will be obliged to compensate the depositors for the “shortage” at the expense of their own capital.

Who was passed over?

In the clause "Justification of the need to draft a bill" the National Bank explains that it pursued two goals. They are as follows: first, to increase the interest of the population in the effective management of their retirement savings; second, to create a competitive environment in the collective investment market and the opportunity for institutional investors represented by the PAMC to enter the domestic securities market. The question of whether the proposed model is interesting to business remains open.

Kairat Chegebayev, the Board Chairman of Nomad Life Insurance Company, in an interview with Kursiv, drew attention not so much to the design proposed by the regulator as to the lack of space for life insurance companies (LIC) in it.

“Today, the LIC is the only market-based financial institution operating in the pension system, albeit in a downsized format (since 2007), and evolutionarily improving terms with almost no complaints. The LICs are one of the most stable fields of the financial sector, and their non-participation in pension reform is wrong, in our opinion” he emphasized.

According to him, LICs have their own vision of the pension system development and now it is being discussed with the National Bank at the platform of Financial Institutions’ Association of Kazakhstan. There are two products in the LIC line, which, according to insurers, might be of a great interest for the customers. The first is a deferred pension annuity (PA), which may also serve as a criterion for the sufficiency of the client's pension assets to provide a life-long pension. The second is pension plan (PP) with unit-linked tool; LICs are the manager of pension assets based on different management strategies.

“These tools can be used together or separately,” says Chegebayev. - We propose to consider the option of using both instruments, namely: the client has the right to conclude a deferred pension annuity (or leave an equal amount in the UAPF), and send the surplus from this amount to risk investment in the framework of the pension plan. This refers to a financially literate population, that is, those who have formed large savings, so if there is an offer for a good product, then there will be demand for it.”

The head of Nomad Life listed benefits of the option offered by the insurers: extensive experience of LICs in working with pension annuities; set approach to regulating the activities of LICs; providing client funds with LIC equity on guaranteed profitability; market-financed payment guarantee instruments (Insurance Payments Guarantee Fund); annual indexation of pension annuity payments, as well as guaranteed profitability; the depositor has the right to both switch from one LIC to another, and return to instruments of variable profitability (PAMC/UAPF); dividing the risk portfolio for the client into PA (guaranteed profitability and indexation of payments) and PP (risk investment).

Unfortunately, our financial society has a stereo-type opinion that LICs are only insurance companies while worldwide LICs are referred to as a portfolio manager of huge assets. They are closer in activity to pension funds and are one of the sources of long money in the economy along with the state budget, pension funds and banks, thereby making a significant contribution to the country's macroeconomic stability. As you know, there are no other sources of long money,” thinks Chegebayev...  

The market is silent

Investment companies operating in Kazakhstan, which Kursiv contacted with enquiry, for various reasons refrained from commenting or ignored the request. In particular, the editors wanted to find out if the business is interested in the amount of money that might theoretically go to PAMCs taking into account the proposed threshold; what should be the minimum yield and should it be at all; what tools should be added to the current certified list, under which the UAPF funds are invested today so that the yield is higher than the current one.

“The minimum yield is a necessary concept, but in this case it is a reference to profitability, which is not in fact the minimum yield, and I, as an actuary, do not like a direct link to GS yield. You just need to stick to government securities, since other strategies will in any case deviate from their profitability, which means risk. As a result, everyone adequately assessing the risk of PAMCs will have one profitability - the yield of government securities, others will simply put themselves at risk,” believes Kairat Chegebayev.

Regarding the certified list of financial instruments for investment, the head of Nomad Life noted that there were practically no alternative instruments by the moment.

“The Pension reform was necessary for the stock market activation. It seems to me personally that with the set list and return fixed to government securities, there won’t be the stock market with or without pension money,” the source said.

“A new concept of transferring assets to private managers has just been received for consideration. The exchange welcomes the increase in the number of asset managers and the creation of opportunities for investors to choose asset managers. HoweverMoreover, the new concept requires a detailed study. In this regard, there are no comments so far,” KASE press service told Kursiv.

According to the UAPF, the market could have received over 420 billion tenge of pension funds today.

“The total assets of investors whose personal savings exceed the indicated amounts (in concept. - Kursiv) are over 1.2 trillion tenge. The total amount exceeding the sufficiency threshold and which, according to the concept, can potentially be sent to the competitive environment for managing the PAMCs, amounts to a little over 420 billion tenge. According to actuarial forecasts, in the 5-year term these indicators will increase by at least 2.5 times,” Saule Yegeubayeva, the UAPF Board Deputy Chairman, told Kursiv.

On the e-government website, where the concept of the bill is posted, it is indicated that the document will be in public discussion until August 14. According to Kursiv, the discussion takes place on the platform of the Financial Institutions’ Association of Kazakhstan. The National Bank press service did not answer the question on when the bill was planned to be submitted to Parliament.


Photos are from open sources.

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