KAZAKHSTAN – Kazakhstan’s pension system has been thrown into turmoil.
On 23 January, president Nursultan Nazarbayev announced that the country’s 11 pension funds will be merged into a single unit and some of the assets deployed in the national economy via bank lending to industry and businesses.
Nazarbayev also wants to mobilise pension assets to relieve pressure on the Kazakhstan National Fund, the central-bank managed sovereign wealth fund set up in 2000 to finance development, provide a cushion during periods of falling oil, gas and metal prices, and invest for future generations.
Its assets stood at $57.8bn (€43.3bn) at the start of 2013, according to central bank figures.
The biggest shock for the local pensions industry is the timeline: the president has given the government and National Bank of Kazakhstan (NBZ), the country’s central bank and pension fund regulator, one month to formulate proposals for the merger.
In 1998, Kazakhstan became one of the first countries in Eurasia to adopt a World Bank three-pillar system.
The second pillar is mandatory for all ages and funded by a 10% contribution of gross wages.
As of the beginning of December 2012, the mandatory system had some 8.4m members and assets of KZT3.1trn (€15.5bn).
One complaint regularly levied against the funds was their low yield.
Average cumulative returns over the last five years were close to 20 percentage points below that of inflation.
Supporters of the new proposal claim that a single fund would save on fees and other costs.
The funds have in turn blamed pension investment legislation for obliging them to devote a large share of assets to government bonds generating sub-inflation returns.
Objections to a single fund inevitably include the lack of competition – currently members can switch to higher performing pension funds.
Objectors also question whether a centrally managed fund would produce a better performance than the private sector, citing the unspectacular investment returns of less than 1.5% in 2011 delivered by the NBZ from its investment management of the National Fund.
Another concern concerns potential deployment of the single pension fund’s assets.
In late 2008, the National Fund lent $10bn to the financial and real estate sector as part of a bailout following the global financial crisis.
The president recently claimed that much of this money would never be returned.
The biggest issue centres on the legal structure of the funds themselves.
As joint-stock companies, they have shareholders, and a number of the funds are listed on the Kazakhstan Stock Exchange.
How the shareholders will be compensated remains to be seen.