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Merger of Kazakhstan’s pension funds planned since 2010

19 february 2013, 13:23
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Photo courtesy of wordpress.com
Photo courtesy of wordpress.com
The widely discussed merger of Kazakhstan’s pension funds was planned since 2010, KazTAG reports citing SilkRoadNews referring to the informed source.

“The suggestion to merge pension funds into one and transfer it to a foreign manager was made back in 2010. A foreign company interested in the local market suggested this to several high-ranking officials of Kazakhstan,” the speaker said.

According to him, the suggestion was not approved back than and was not rejected either. However, “Kazakhstan officials told the foreigners that the suggestion has to be made in the form of recommendations of an international financial organization, the International Monetary Fund or the World Bank: only then it will be possible to pass this suggestion on to the government and the President of Kazakhstan”.

“At the time when the suggestion was made the West was immersed in the crisis and foreign companies were desperately searching for any money hoping to quickly buy depreciating assets. Kazakhstan’s pension system was very attractive. Even now, with the profitability of pension savings twice lower than the official inflation rate, the local funds are coping with crisis better than any of the foreign management companies. Foreign asset management companies have lost dozens of billions of dollars since the beginning of the crisis in 2007: this is more than the amount they were planning to manage in Kazakhstan (around $20 billion),” the source said.

According to him, having introduced the Defined Contribution Pension System, Kazakhstan outran many other countries by progressiveness of the pension system and its readiness to face financial shocks. However, the problem is that the financial control system is more of a prohibitive time than an incentive one. Even more restrictions have been introduced by the financial control agency after the recession started. Viewing the profitability of the pension funds in isolation from the restrictions allowed the lobbyists to convince the government and the President of the necessity to merge the funds, the speaker noted.

Going back to the foreigners’ suggestion, he distinguished its three main parts. First of all, it is necessary to integrate all the pension assets in one fund. Secondly, these assets have to be transferred into external management. Thirdly, the country has to be ready for the fact that the effect from the merging of the funds and the external management will become visible only after 10 years.

The authors of the suggestion were grounding themselves in saying that Kazakhstan's pension system had many problems that were bound to continue growing. The document, however, does not mention anything about the legislative restrictions the pension funds are operating under (the restrictions are called to lower investment risks). The restrictions are not going to be the same for the merged single pension fund. It will be operating under different conditions and the work of the foreign management company will be much easier. Another evident difference is that if a Kazakhstan pension fund makes a mistake, it is under jurisdiction of the local law-enforcement authorities and will be held liable for it, whereas the foreign manager can avoid liability, especially since the plan was to make London the arbitration location, the source said.

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