The creation of a new single pension fund in Kazakhstan is officially aimed at improving the state pension system. However, such a reform, in addition to the nationalisation of private savings funds, will concentrate most of the mandatory and voluntary pension savings in the hands of the state. Experts fear negative consequences of the reform for both savers and investors.
Creation of a single pension fund
24.04.2013 Majilis (the lower chamber of the Parliament) approved the second reading of the draft bill “On pensions in the Republic of Kazakhstan”. The reform will raise the retirement age for women, phased in over a period of 10 years, and mean the creation of a single pension fund (ENPF), which is to be established on the basis of the State Accumulation Pension Fund (SPAF). A swift, negative reaction to the reforms of the population of Kazakhstan provoked the active discussion of the controversial bill in parliament.Moreover, the Kazakh media reported that there are rumours of a possible 4-year postponement of the reform.
The bill was drafted on the initiative of the President of Kazakhstan Nursultan Nazarbayev on 23.01.2013 at an extended meeting of the Government. Nursultan Nazarbayev charged the Prime Minister Serik Akhmetov and head of the National Bank Grigory Marchenko with the creation of the ENPF through the transfer of accounts of all private pension funds (NPF) to the newly formed structure. According to Nursultan Nazarbayev, the consolidation of pension assets will make it possible to distribute citizens’ income by a safer and more effective means, including the distribution of funds to the real economy as well as the development of industrialisation and entrepreneurship.
The Minister of Labour and Social Policy of the Republic of Kazakhstan Serik Abdenov said the funds of ENPF will be invested in infrastructure projects, as well as in the development of small and medium-sized businesses within the state program ‘Business Road Map – 2020’. Under the program, new-business initiatives will be supported by the state in the form of subsidised interest rates of bank loans for projects, as well as the partial guaranteeing of loans.
The government of the Republic of Kazakhstan is planning to accumulate all of the pension funds in a single fund until 01.07.2013. Under the bill, the government of the Republic of Kazakhstan will be an ENPF shareholder. This will be the only organisation which will attract mandatory pension contributions. In addition, ENPF will provide voluntary individual retirement accounts. The funds will be kept in the National Bank, which will be a custodian bank. The National Bank will provide distribution and management of ENPF assets, according to the investment strategy that will be adopted by the Council on the management of the ENPF pension assets. The President of the Republic of Kazakhstan will approve the members of the Council which will have a consultative and advisory function.
As of 01.01.2013, in Kazakhstan there were 10 private pension funds and one public fund in operation, the cumulative savings amounted to 3,188 trillion tenge (16.3 billion euros). According to the Committee for the Control and Supervision of the Financial Market and Financial Organisations of the National Bank, as of 01.01.2013 there were almost 8.4 million NPF depositors in Kazakhstan, that is, almost every second citizen of Kazakhstan.
The nationalization of pension savings
The Government believes that ENPF will facilitate the administration of the assets, minimise risks and ensure the safety of pension savings. As the guarantor of the minimum pension, the government speaks forthrightly about its entitlement to change the pension system. One of the main arguments of the government for the establishment of ENPF is the poor management of savings, which are being negatively affected by inflation. At the same time, managers of private NPF point to the lack of legal mechanisms which allow for the investment of pension assets in profitable securities.
The bill on the establishment of the ENPF stipulates that private NPF will continue with their activity as the managing bodies of the investment portfolio or as voluntary NPF. However, a mediated control of the state is established over the largest private APF from the point of view of their assets. This kind of policy in Kazakhstan has been labelled ‘nationalization’ by Reuters.
On 04.03.2013, the Cabinet of Ministers of the Republic of Kazakhstan decided that the state-owned National Welfare Fund ‘Samruk-Kazyna’ will become, through the purchase of shares, a shareholder of three private pension funds: APF of Halyk Bank of Kazakhstan, Grantum (Kazkommertsbank) and Ural Umit (BTA). People’s Bank in return for its NPF was offered a share in the BTA Bank (97%). In order to acquire the NPF of Kazkommerzbank, the NWF “Samruk-Kazyna” was prepared to surrender its share in the bank‘s capital (at present, Samruk-Kazyna owns 18.3% of Kazkommerzbank). In terms of the number of NPF assets, the NPF of the National Bank of Kazakhstan currently sits in 1st place, the State Accumulative Pension Fund – 2nd place; UralUmit – 3rd place, Grantum – 4th place. By these means, after carrying out all the above-mentioned financial operations, a vast majority of the voluntary pension funds will also be under the control of the government.
In European practice, there are examples of the creation of the unified state pension funds in times of crisis. In Norway in 2006, the oil fund was renamed ‘the pension fund’. The Fund is fuelled by taxation of the oil industry.In 2010, in Hungary, as a result of the global financial crisis, pension funds were nationalised. Citizens were able to remain in private funds, but in doing so surrendered their right to a compulsory state pension. However, in this case, the State did not acquire the capital of private pension funds as such. In addition, this practice is not popular today. In March 2013, the European Union considered it unacceptable to nationalise the pension funds in Cyprus, despite the crisis.
Pension reform – a threat to the market conditions in Kazakhstan?
The draft law “On pensions in the Republic of Kazakhstan” was developed without broad public debate. For comparison, in Canada and in the European Union, there were extensive public hearings held on the reform of the pension system.In Kazakhstan, where the bill had already been prepared, government representatives travelled to the regions for community meetings, campaigning in support of pension reform. Simultaneously, criticism and suggestions from members of the public were ignored. However, in the city of Uralsk (West Kazakhstan Region), local authorities banned a rally against the pension reform on 27.04.2013. According to some studies, 70% of Kazakhs do not support the state initiative, believing that the new pension system will not be more effective.
It should take into account that the profitability ratio of private NPF (from 3.5% to 7.5%) is higher than the state-owned NPF’s ratio (3.93%). In connection with the bill, the National Bank has limited NPF’s investment opportunities, thus lowering their yield. In addition, citizens’ pension savings will be invested in infrastructure projects. However, it is known that the yield from infrastructure projects is typically low, and they require quality control.Moreover, Kazakhstan has an unfortunate experience of investing in infrastructure projects – the Shar – Ust-Kamenogorsk railway, on which more than 24 billion (122.2 million euros) of pension funds was invested in the construction. The work commenced in 2005, but the railway still remains unfinished.
The presence of a single state pension fund increases opportunities for corruption and abuse, as the flow of funds will be controlled solely by the state – the monopoly in this area. According to the international organisation against corruption Transparency International, in 2012 Kazakhstan ranked 133 in the Corruption Perception Index (out of 176 countries).
The decision about Samruk-Kazyna acquiring a share in the capital of the largest private NPF evokes concern. The experts point to the growth of off-balance sheet liabilities of the National Fund’s subsidiaries, as well as to the lack of control over its cash flow. For example, $10 billion allocated for the recovery of the banking sector was not returned to the Samruk-Kazyna’s NPF. Large-scale corruption in the enterprises of Samruk-Kazyna’s NPF has been well-documented. For example, in the “Makat locomotive depot” over several years 120 million tenge was stolen. In addition, the violation of social rights by the Samruk-Kazyna NPF was one of the causes of the longest in the history of Kazakhstan; the peaceful strike of oil sector workers in Zhanaozen, which lasted from 11.05.2011 to 17.12.2011. On 16.12.2011, the police opened fire on demonstrators, killing 17 people according to official data. Most striking oil workers were employees of Karazhanbasmunay and OzenMunayGaz companies, owned by Samruk-Kazyna. For their participation in strikes, about 2,000 oil workers were dismissed from their posts in the summer of 2011. On 07.09.2011, the Chairman of the Board of JSC “National Welfare Fund Samruk-Kazyna”, the President’s son-in-law, Timur Kulibayev, declared that the dismissed strikers will not be reinstated as “they violated labour laws”. After the Zhanaozen tragedy, on 22.12.2011 Nursultan Nazarbayev declared that Timur Kulibayev had resigned.
Experts point out that private NPF take play an active role in the processes undertaken on securities markets. In particular, they inflate the national budget by buying government securities. Their activity creates competition in the securities market, providing liquidity and fair assessment of securities. Critics of the reform fear that the creation of ENPF may lead to the market’s dependence on the investor-monopolist and increase the level of corruption in securities transactions. The ENPF will invest in infrastructure projects, consequently, it will invest less in private securities. This will lead to a decline in the number of securities in which international investors will be able to invest. Kazakh companies will also suffer from this policy since they will not be able to invest in new projects and will lose access to cheap funding.
Experts also point to many other negative aspects of the new pension system, for example: the violation of the rights of depositors, the lack of competition, restriction of private enterprise, the violation of the rights of private business, the ineffectiveness of public management; proven in practice and the loss of 12 to 20 thousand jobs in private pension sectors.
The conventional wisdom states that the pension reform may deteriorate the investment climate in Kazakhstan. Idar Alibaev, president of the Association of Pension Funds, said that the government, by merging all pension funds into one, demonstrates its contempt for the investors. The government demonstrates that it has the ability to destroy any private business. According to Alibayev, it will lead to a rise in the price of foreign credit.
On 13.02.2013, the investment bank Visor Capital Team declared that as a result of the pension reform, international investors will lack confidence in the unpredictable Kazakhstan market: “Definitely, all foreign investors and international observers will consider this development a deterioration in market conditions in Kazakhstan”.
The creation of a single pension fund is a fairly common practice in combating the effects of financial crises. Kazakhstan’s specificity is the fact that not only mandatory (as ENPF), but also voluntary pension contributions will be state-owned, as the state-owned National State Fund “Samruk-Kazyna” was allowed to enter the capital of the largest private NPFs. “Samruk-Kazyna” is also known for corruption scandals, money laundering by the management and the provocation of social conflicts in the Mangistauskaya area, particularly in the city of Zhanaozen in 2011. In spite of the disapproval of the public as well as experts’ criticism, the government continues to implement the policy of monopolization of pension assets. The main counter-arguments and weaknesses of the reform will pertain to the creation of an environment ideal for the expansion of corrupt transactions, the monopolisation of the market and the deterioration of market conditions for investors. As a result, the consequences could adversely affect the profitability of pension savings and competition in the securities market.