Kazakhstan’s second pillar is entering a new phase as the government prepares to sell off majority stakes in the asset management company of the State Accumulation Pension Fund (GNPF). GNPF is an unusual feature in the region, in a country that remains the only Central Asian republic to date to have reformed its pensions system into the World Bank three-pillar model.
GNPF started operating in January 1998 when Kazakhstan’s law on the mandatory second pillar took effect, closely followed by other, privately run, funds. The Kazakh system, funded by diverting 10% of the 28% social security contribution financing the state PAYG system, is mandatory for the entire working population, including those with a few years’ work service left. At the time the retirement age also started rising incrementally, from 60 years to 63 today for men, and from 55 years to 58 for women. With about two workers supporting one beneficiary, Kazakhstan’s demographic situation is not as critical as that of other members of the Commonwealth of Independent States (CIS), but the replacement rate of the revised pension system will still only cover 40% of wages in 25-30 years’ time, so the government is looking at ways of boosting the state pension, including providing incentives for voluntary employer contributions.
GNPF’s clients exceed 2.3m – more than 35% of all contributors. GNPF still has a 23% asset share but was recently overtaken as the largest by Halyk Bank’s fund. It has suffered an inevitable loss of market share as clients became sufficiently sophisticated to choose for themselves. “The intention was always to privatise the fund when it was no longer that dominant,” explains GNPF director general Zhanat Kurmanov.
The first step of the privatisation will involve European Bank for Reconstruction and Development (EBRD) taking a 10-20% stake, ahead of a strategic investor purchasing a majority stake six to 12 months later, with the state retaining a 10-20% stake for up to two years, according to Jonathan Woollett, EBRD’s director of non-bank financial institutions. The EBRD already has seven pensions-related investments in five countries in its sphere of operations, while its Kazakh investments, all outside the pensions sector, total around e950m. In addition to providing technical assistance and, improving corporate governance, the bank sees its role in the GNPF privatisation as sending a positive signal to potential high-calibre investors, while deterring unscrupulous operators. “We want to encourage reputable bidders,” stresses Woollett.
The primary income in running a pension fund comes from administration and asset management fees, the latter dependent on the size of the fund, and bidders would be tendering for a large fund in a dynamically evolving market. At the end of 2003 the system had 6.2m members and an accumulated pensions volume of KZT368m (E2.1bn at the prevailing exchange rate), a year on year growth of 37% in nominal tenge terms. By the end of May 2004, assets had grown
by a further 10% to e2.4bn, equivalent to 9% of GDP and 38% of bank lending. Furthermore, the Kazakh economy is booming: GDP grew by 9.2% year on year in 2003 and a further 9.1% in the first quarter of 2004.
In a region not renowned for its financial probity or stability, the Kazakh pension system has remained robust and scandal-free. In 1998, its first year of operations, it weathered the collapse of the Russian rouble and its crippling effects throughout the entire former communist bloc. The pension reform was the brainchild of former central bank governor Grigori Marchenko, who recently became presidential adviser. Marchenko is credited with creating the best regulated and most efficient and transparent financial system in Central Asia. Between 1998 and 2003 the regulatory functions of insurance, securities and pension funds industries were brought under central bank supervision, strengthened and finally consolidated into the Agency for Regulation and Supervision of Financial Markets and Financial Institutions, which started operating as an independent regulator at the beginning of 2004.
By law GNPF also had a more conservative investment policy, restricted to Ministry of Finance and National Bank of Kazakhstan (central bank) securities, domestic bank deposits and bonds issued by international financial organisations, although this changed as September 2003, when it was allowed to invest in the same asset classes as the private sector. It was also permitted to market for new clients. “Our status is now similar to the privately run funds except that our shareholder is the government, and we are no longer a fund ‘by default’,” notes Zhanat Kurmanov.
That year the law was changed to allow asset management companies to merge with and manage their own pension company – previously only GNPF could do so – although to-date only Halyk Bank has done so.
The minimum capital requirements for asset management companies have been raised from KZT180m to KTZ250m for those not managing their own fund and KZT500m for those who do.
GNPF’s 15 competitors include those targeting higher earners and smaller niche players focusing on their corporate clients. “We consider GNPF as a retail fund, regardless of size or income. Our focus is to keep our contributors and market share and improve the quality of our services. We have a wide network, brand name and are well capitalised, so conservative contributors choose us. The government shareholding is also a plus point,” explains Kurmanov. “We are also the main pension fund in the regions.”
The criteria for strategic investor bidders has not been established yet, but as Woollett notes, the authorities want a wide range of bidders. Insurance companies are welcome in order to enable the government to kick-start the nascent life insurance industry, and so are companies with foreign asset management expertise, as Kazakh legislation allows the pension funds to invest up to 40% of their portfolio in foreign securities (see box).
Compared with Russia, the foreign financial presence in Kazakhstan has been muted. One of the longest established foreign financial institutions is ABN Amro. ABN Amro Bank Kazakhstan was set up in 1994, while the asset management company is the only foreign-owned entity actively involved in the Kazakh pensions system. It currently manages ABN Amro KaspiyMunaiGas and Capital open pension funds, and the closed-end corporate fund for Philip Morris Kazakhstan. According to Alina Aldambergen, head of the asset management company in Almaty, and of the Asset Managers Association in Kazakhstan (the financial industry’s professional body), the company
saw the new defined contribution pensions system as an attractive market.
“Most of our pension fund customers are employees of corporations, including foreign entities and oil firms,” she explains. “At the beginning we mainly had highly paid contributors to the pension fund, and although this is being diluted, we still have the highest accumulation per person.”
The pension funds compete for customers through their corporate relations, and in the case of retail banks, through cross selling of mortgages, insurance and other financial products. Gulnara Alimgaziyeva, vice president of ABN Amro KaspiyMunaiGas Pension Fund, adds that the fund uses the group’s international experience, qualified personnel and independence. “The rate of return used to be used to attract customers,” she notes. “Now reliability is a key factor. We market ourselves as a conservative investor with strict internal procedures.”
All the market players see the privatisation of GNPF as increasing competition in the market, as it actively bids for client. Kurmanov foresees an eventual consolidation alongside a further strengthening of the industry. “Right now we have 16 funds, which is too many. As capital requirements increase, there will be mergers. We will have fewer than 10 funds, but all will be well capitalised.”