Article: Private Pension Funds

Private Pension Funds

Alzhan Stamkulov
Partner, Synergy Partners Law Firm

WTO and Kazakhstan. Kazakhstan joined the WTO and opened its management of pension assets market to private companies. In other words, the legislator should remove the state monopoly on managing pension assets without delay.

If you go back to the old system, you need to make a number of improvements to eliminate the previous mistakes, and also to meet the requirements of the WTO. Let us consider it in more detail.

Management of USPF (United Saving Pensions Fund) facilities. In early 2016, the National Bank of Kazakhstan made the assumption that part of the USPF funds will be transferred to the management of private companies. This assumption is contrary to WTO requirements. That is, management companies should have access to pension funds, rather than funds of the USPF. They must fight for customers in a competitive environment. Customers will choose who to entrust their savings and on what terms.

Conflict of interests of shareholders and management companies. The main mistake of the past years was the conflict of interests on the part of owners of management companies. To get cheap financing, a financial industrial group bought a management company with a pension fund. Then, an affiliated subsidiary, which needs financing, issued corporate bonds that were bought by this pension fund. The management company acted in the interests of its shareholders, and not of the clients-investors.

Therefore, the law should prohibit management companies from buying pension funds from securities of affiliated entities, and also prohibit management companies from cross-swapping with another management company for the purchase of corporate bonds, as a way to circumvent the affiliation.

In addition, the law should also prohibit classical banks from owning management companies with pension assets, as there will immediately be a conflict of interest in placing pension savings in these banks or buying securities of these banks to maintain the capitalization and prudential standards of the bank.

Conflict of interests of the state and management companies. A similar mistake was the conflict of interests of the state. This conflict of interest is, perhaps, the biggest mistake in the history of Kazakhstan. We will explain. Everything was created in such a way as to oblige pension funds to buy low-yielding Kazakhstan treasury securities, securities of national companies and Kazakhstan banks. Previously, pension funds and now the USPF have no other choice.

In practice, it turned out that the state borrowed money from pension funds to finance its various government programs, such as the EXPO, the Pantheon, and for other vague purposes.

The state financed national companies through savings from pension funds under very low remuneration. As a result, pension funds did not earn income to cover inflation. But national companies could get financing for less than 5% per annum in tenge. For comparison, SMEs could receive financing from banks at 18-20% per annum in tenge. With the decrease in oil prices, the situation became very clear. SME sector in the economy was contracting, while the state presence in the economy expanded. Of course, employment and tax revenues did not increase. As evidence, we can cite the fact that most regions and cities do not have SMEs as the main taxpayers.

The question arises, why should pension funds provide financing to the state at very low interest rates for unclear purposes? If the state wants to borrow, then it should do it on market terms and upon the decision of the management company. Why would the state borrow money, if public spending is not entirely understandable to the public? Probably, it is already more than obvious that it is necessary to eliminate such a conflict of interests.

Investment opportunities of funds. Investment opportunities for pension asset management companies are a major issue. Managing companies should be able to act solely in the interests of their clients, not the state. This is the ability to store savings in foreign currency, in foreign financial institutions with high investment rates, buy shares from the list of S&P500, and buy high-reliable fixed income financial instruments. Of course, an opportunity to use some risky investment tools should also be given to a management company. The essence of all the possibilities is that you can protect yourself from various risks while making a profit.

Partial withdrawal from pension savings. In early 2017, the representatives of the USPF reported that they were considering the possibility of a partial withdrawal from the pension savings by the consumer for his specific needs, for example, a mortgage.

To answer this question, let's look at one example. For example, a man of 45 years must have a complex operation to remove a benign tumor. It’s the question of life and death. Suppose he does not have his own funds for the operation. Compulsory medical insurance only began to work from January 1, 2017 on the principle of a solidary model, and this system cannot provide him with insurance coverage for inpatient treatment and surgical operation. The only option is his pension savings. If he has retirement savings, then why can not a part of the savings be removed to save his life by an expensive surgical operation?

The answer is obvious. Citizens should be able to (1) partially withdraw their pension savings for vital medical operations that are not covered by compulsory health insurance, (2) buy or purchase medical voluntary insurance or health-care packages from investment income in order to obtain a broader or more universal medical care as an alternative to compulsory health insurance. This can be on an annual basis or on a semi-annual basis.

For example, an employee with a monthly salary of 200,000 tenge for the year received an investment income of 15,000 tenge due to pension contributions and savings. The employee decided to buy medical insurance for 15 000 tenge for six months. Pension funds will help to develop our medicine, as funding would be more competitive, which would lead to improved quality of medical services through competition. The employee himself chooses the medical insurance company that suits him or selects a subscription service in a private clinic with its insurance package and service. The money go to medical insurance companies and clinics directly from the pension fund. What will happen? There will be competition, the market will choose a more economical and efficient player in the medical services market. Conversely, people will choose those management companies pension assets that can increase investment income in order to buy more expensive medical insurance with more coverage or service.

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