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Kazakhstan discusses merging pension funds
Country wants to merge 11 funds into one
By Alexandra Babkina
ALMATY – Kazakhstan plans to create a single state pension fund to replace 11 existing funds by August. And while the proposed reform should mean higher returns, it will deprive retirees of choice, market participants said.
KazTAG, the government news agency, which reported the upcoming merger, said a foreign firm that has previously worked with the government would manage the new fund.
Some observers predict a prosperous future for the pension system, but others see no logic in changing things now.
“At the end of the last millennium, Kazakhstan became the first CIS country to introduce a cumulative pension system,” said Daulet Sakhipov, executive chairman of the Ular Umit pension fund. “Unfortunately, this system ... still needs improvement. However, in my opinion, it would make much more sense to improve the existing model ... rather than tear down everything and build from scratch.”
Pension funds not lucrative
Under existing pension law, since January 1, 1998, all workers have had to contribute 10% of income – but can increase that amount – into their choice of 11 pension funds, one public and 10 private.
To date, the assets of the country’s pension funds amount to US $17 billion (2.5 trillion KZT).
The returns vary significantly, according to pensia.kz, the official pension portal. In the first quarter this year, 4 of the 11 funds lost 3.5 billion KZT (US $23.8m) while the others earned more than 6 billion KZT (US $40.8m). However, only the state fund, with a 5.26% yield, beat the inflation rate (4.8%) over 12 months. NPF Astana fell just short, returning 4.78%.
The disparity in performance, though, has little effect on how much a pensioner receives monthly; instead, supporters of reform are stressing the need to use pension contributions to improve the economy as a whole.
“To improve the viability of the pension system, we must improve the market infrastructure, increase its size, help local companies enter the debt market, and in addition, encourage small and medium-sized businesses to raise funds through the Kazakhstan securities market,” Nurlan Rakhimbayev, director the Asyl-Invest think tank, said with respect to increasing the profitability of pension funds.
A major shortcoming is that retirees lack ways of influencing pension funds’ investment policies, he said. Other flaws include low stock market liquidity, a shortage of high-quality financial instruments, and reduced investment in the corporate sector, he said.
“Pension funds should invest in profitable industries, which would enable new companies to open and lead to job creation,” he said. “(The pension funds) really would be working for the economy.”
Pension reform debated
Problems with the pension system have not gone unnoticed. President Nursultan Nazarbayev addressed the need for pension reform in his annual message to the country in February.
Creating a unified pension fund could boost returns, Sergey Plotnikov, a member of the Senate committee on finance and budget issues, said. However, the high returns won’t come unless the government also creates more acceptable legal conditions for pensions, he said. He mentioned control of inflation and requiring broader investment in the non-financial sector as areas that need improvement.
Regulators also will have an easier time overseeing one fund instead of 11, making investments safer, he said. Others aren’t so sure about the wisdom of pension reform.
“The creation of a common fund to be managed by foreigners is not in the national interests of Kazakhstan,” Aydar Alibayev, president of the Association of Pension Funds, said. “Foreign involvement ... is completely unnecessary.”
“Kazakhstan has plenty of experts in this industry,” Rakhimbayev said. “The pension market does not need foreign management, especially if we pay attention to factors like the pension crisis in Europe.”
“It is in the interest of Kazakhstan that the retirement assets work for our economy,” he said, warning that a foreign-managed fund likely would invest the money abroad.
Unified pension fund would eliminate competition
Another concern is that a lack of competition would give the pension fund manager no incentive to outperform.
“The pension market should be competitive,” said Sandugash Iklasbekova, deputy chairwoman of the Grantum Pension Fund. “If all of the pension funds merge into one, then retirees will be left without a choice.”
“Many people are not inclined to believe in the current system ... especially if the returns are not stable,” she said. “What people, especially the elderly, want from the pension system is stability. ... The news of merging pension funds will only generate anxiety.”