30 октября 2014 13:15

Kazakhstan National Bank official explains Single Pension Fund losses


Single Pension Fund ©Turar Kazangapov Single Pension Fund ©Turar Kazangapov

Advisor to the Governor of the National Bank of Kazakhstan Olzhas Khudaibergenov explained the losses of the Single Pension Fund (SPF) as of the end of September this year on his Facebook page, Tengrinews reports. The advisor clarified that it was his personal opinion, not the official position of the National Bank.

Advisor to the Governor of the National Bank of Kazakhstan Olzhas Khudaibergenov explained the losses of the Single Pension Fund (SPF) as of the end of September this year on his Facebook page, Tengrinews reports. The advisor clarified that it was his personal opinion, not the official position of the National Bank.

Last year Kazakhstan implemented a large-sclare reform of its pension system than nationalized the realm of management of pension money and eliminated competition from the market. In June 2013, Kazakhstan revising its Pension Law creating the Singe Pension Fund fully owned by the government and managed by the National Bank of Kazakhstan. Transfer of the pension savings from a dozen of private pension funds that existed in Kazakhstan before the reform into the newly created single fund was completed nearly a year later.

After that the National Bank of Kazakhstan had to reevaluate the pension assets, so it hired an independent appraiser – KPMG – to do it. After the portfolio reevaluation 97.9 billion tenge ($540 million) was debited, and the size of the pension assets in the Single Pension Fund now equals to 4.3 trillion tenge ($23.75 billion).

It is expected that the yield of the pension assets by the end of this year will be at 6.5 percent, while for the next year it should be somewhere between 7-7.5 percent.

Olzhas Khudaibergenov began by emphasising that assets of SPF were managed by the National Bank, not the Fund itself. He then reminded that the process of unifying all the private pension funds into one – the SPF – had finished in April this year. During summer technical work was underway, in particular the one related to pricing the assets that the fund received, and KPMG was hired for an independent valuation.

Khudaibergenov said that some of the assets acquired from the private pension funds were problematic. “It was decided to assess their fair value, meaning to recognize losses – this decision was made in September. It explains about half of the losses incurred as of September,” he wrote.

Weighted average return on invested pension savings (% per annum)

Weighted average return on invested pension savings

As for the second part of the losses, Khudaibergenov claimed that “the SPF was able to negotiate itself more favorable terms on government securities (GS) - now the rate is at about seven percent. But according to financial reporting standards, previously purchased government securities (that have the rate of about five percent) shall be reassessed at the new rate, and thus the loss is calculated from the rates difference. There is no monetary loss, but on paper there is a loss.”

Khudaibergenov said that the overall losses made about 94 billion tenge (about $520 million). However, even adding this up into the equation, the yield was a little less than 4.5 percent from the beginning of this year. September yield was 7.3 percent, while the average yield of private pension funds ranged between 3 and 4 percent.

According to Khudaibergenov the yield is greater for the SPF because of the higher rate on government securities and deposits placed by second tier banks (STBs). The average rate is around 9 percent, which is twice higher than it was before.

The other difference is that the private pension funds were placing deposits in second tier banks for terms ranging between one month and three years but now the terms range between five and ten years. That is, deposits became long-term, which should give a positive economic effect.

Khudaibergenov also explained why the National Bank was investing in second tier banks, a practice that has been causing distress among some of Kazakhstani lawmakers.

The banker said that private pension funds were practicing this even before the National Bank stepped in. As of 1 January 2013, private pension funds invested 320 billion tenge ($1.78 billion), or 10.4 percent of all the pension funds, into STBs. There are currently about 670 billion tenge ($3.7 billion) on deposits, that is about 15 percent of the SPF assets. However, Khudaibergenov said, the SPF had been mostly investing in GS and deposits, as opposed to riskier investments of private pension funds into securities of Kazakh companies (around 20 percent of all the pension funds).

In addition, the Advisor to the Governor of the National Bank noted that there were clear and strict rules governing the choice of second tier banks to invest into. The bank must have a high rating and a larger own capital than the banking system average, which leaves only big banks in the game. In addition it has to comply with all the prudential standards.

"Take Alliance bank for example, it has no access to these money and this makes the banks consolidate," he said. However, according to the information cited by a Kazakh MP earlier this month, the group of Alliance and Temir banks that has negative own capital of 54 billion, raised 39 billion from the SPF.

He also commented on the fact that the banks had received pension assets worth more than their own capitals. “References to that fact that the banks received more money than their own equity are not very appropriate. We could limit the investments to the size of the banks own capitals, but in this case we would reach the ceilings quite fast, and all the new money would have to be invested only in government securities. On the other hand we could set a multiple factor, meaning that a bank cannot get more money than n-times its own capital. And most likely, this will be the option that the central bank will adopt," he added.

He said that each bank was assigned a minimum interest rate based on its rating. "Unfortunately, there is no maximum threshold, even though it makes sense to introduce one because the banks might start inflating interest rates, which will ultimately increase the cost of funding for the banking sector,” he noted.

The Advisor added that he believed the rate should be somewhere in the corridor of 7-9 percent and preferably closer to the lower limit of the corridor, as opposed to being closer to the top as it is at the present moment. Making it below this corridor will hurt the return on assets, whereas setting the rate above this corridor will hurt the banking system, he explained.

Khudaibergenov said that the SPF injected about 470 billion tenge ($2.6 billion) of long money into the banking system since the beginning of the year. There is a risk that STBs will use this money for currency speculation as opposed to lending to the economy, which is why a special rule was introduced, which would allow withdrawing deposits from the banks prematurely should they attempt to speculate on forex markets.

“There are banks that do not agree with this point, and still do not participate in deposit auctions, although they are eligible as per the set criteria. But this is a question for them to decide, not for the National Bank," the economist concluded.

By Dinara Urazova

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