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 KAZAKHSTAN International Business Magazine №2, 2007
 Pension Funds. Re-assessing Values
Pension Funds. Re-assessing Values
The Kazakh Agency for the Regulation and Supervision of the Financial Market and Financial Organisations (FSA) implemented the new norms for estimating pension funds’ assets early in 2007. The FSA’s goal was to define the fair value of Kazakh issuers’ shares in the pension funds. The notion of an active market was introduced; it was also defined that the funds can mark to the market only in cases where an active market exists. However, the method lobbied by pension funds caused additional headache for them.
Kazakhstan’s current pension system was created by a reform in 1998 based on the Chilean type. The principles of obligatory individual savings allowed the existing pension system to be reconsidered and considerably reduced the protective role of the government in this sector of social welfare. An additional argument for this approach was that the new pension system implemented in Chile in the early ‘80s produced a positive effect on the Chilean economy: it fostered the development of its national financial system and stimulated the privatisation process and mortgage construction.
Following the 1998 reform, the pension system also began to develop in Kazakhstan. Today, there are 14 pension funds in the country; their activity is regulated by the FSA. The total amount of pension savings reached 986 billion tenge as at 1 May 2007. During the period from January to April 2007 alone, the indicator grew by 19.2 billion tenge compared with a growth of 21.8 billion tenge during 2006 as a whole. As for the number of individual pension accounts, these totalled 8.8 million, i.e. 11% more than the beginning of 2007. GNPF, NPF of Halyk Bank of Kazakhstan, UlarUmit and BTA Kazakhstan reported the largest number of accounts for obligatory pension contributions. These four funds account for approximately 80% of the market. The leading position of the GNPF state pension fund was historically defined because in the early phase of the pension system development it played the role of a “default fund”. This meant that any person who did not choose a pension fund became a client of GNPF by default. Today, GNPF’s share in obligatory contributions is 27%, compared to 90% in 1998.
The pension funds’ main goal is both preserving pension moneys and ensuring their profitability, which should equal or exceed inflation. That is why investing into profitable and reliable instruments is a priority for the funds. Currently these funds are the major players in the securities market. According to the Kazakhstan Stock Exchange, pension funds’ assets grew to $7.16bn and the total nominal value of A-listed bonds was $6.46bn as at the end of 2006. Therefore, the funds play a very important role in the real economy and are the main investors in domestic companies. This is why any changes concerning their activity also influence the securities market.
To ensure the preservation of pension moneys, only a properly licensed custodian bank can be a nominee holder keeping the assets of pension funds. This will allow pension funds to keep separate records for pension and their own assets. Until recently, only specialised managing companies could manage pension assets. Today, there are seven similar companies in the market. Last year, pension funds were also allowed to manage their pension assets independently; six of them have already exercised this right. According to their representatives, this step allowed significant savings. For example, one of the pension funds paid 30 million tenge to a managing company in 2005, meanwhile a mere 3-4 million tenge is needed each year to maintain their own asset management department. Additionally, the funds acquired the possibility of independently developing their own asset management strategy. As a result, several pension funds noted that their profitability continuously increased from the day they stopped working with specialised organisations.
Portfolio and Its Contents
At the moment, pension funds’ assets exceed 1 trillion tenge or 10% of the national GDP. The Kazakhstan pension system grows by 15-18 billion tenge each month. Under these circumstances, pension funds search for new investment instruments and opportunities.
According to the Capital pension fund’s deputy chairman Ibrai Irkegulov, each fund targets to receive the maximum revenue at a relatively acceptable risk to lose it. To attain this goal, each fund forms its own investment portfolio which comprises various securities of particular ranges and profitability.
On average, pension funds’ portfolios comprise governmental bonds (28%) and domestic corporate securities (1.8%). Deposits account for 4.19% of portfolios. According to the FSA, the funds only place their pension assets in second-tier banks in the national currency. As for foreign non-governmental securities, their share is 7.59%, and the share of foreign governmental bonds is negligible. Foreign securities used to be attractive because of the profits proceeding from the difference in rates of exchange; however, pension funds’ interest towards them gradually reduced as the tenge became stronger.
Starting in 2007, all pension funds must provide their clients with investment declarations which would cover major principles of their investment policies. Each fund should have its own declaration. Additionally, the FSA began issuing a monthly list of risk factors by pension funds, so that depositors could compare their funds’ revenues against the risks taken. The most suitable index is the fund’s nominal yield factor, especially if it covers a period of more than 60 months. The figure averaged 44.94% over the last five years, with BTA Kazakhstan (91.19%), Atameken (55.46%), Otan (54.1%) and Capital (50.07%) among the most profitable funds.
However, pension funds following a conservative investment policy believe that the high profitability of bank affiliated funds is mainly due to the shares of their parent banks. This type of security is considered the most risky; meanwhile second-tier bank shares in the portfolios of their affiliates make this risk even higher. That is why investments in securities issued by affiliated structures were limited to 10%.
They Got What They Wanted
Experts believe that the values of the majority of pension funds’ portfolios are overestimated today. First of all, this is due to the fact that the share of domestic securities in these portfolios is very large (according to the FSA, the figure was 45% as at 1 March 2007). A fund’s portfolio is reassessed regularly for the depositors to see the pension accumulations dynamics. Until 2007, a so-called “market evaluation” was applied, when the results of transactions with particular securities were taken as the prices of the shares in the pension funds’ portfolios. Therefore, one overestimated transaction could provide the possibility of increasing the portfolio value; however, it was not guaranteed that the fund could sell the shares at this very price. The president of Grantum, Natalya Brezhneva, agrees with that. According to her, the analysis of funds’ activity showed that their yield is unrealisable, because the prices are artificially inflated on the market.
According to the Irbis information agency, Raiffeisen International sold 351,139 ordinary shares of BTA for €136.5m (62,178 tenge per share) to East Capital in August 2006. At the same time, the “market price”, which could be used to evaluate BTA’s shares in pension funds’ portfolios, reached 108,500 tenge per share.
As a result of this, the FSA implemented new norms to evaluate portfolios of pension funds from 1 January. The FSA’s goal was to exclude overestimation and define the fair value of shares issued by Kazakhstan’s companies. The agency introduced the notion of an active market and stated that pension funds can reassess their securities in compliance with market value only if such a market exists. The market in certain shares is deemed active if transactions with these shares were carried out every day during the last month or if the difference between the market maker’s buy and sell quotations does not exceed 3%. In all other cases, the value of particular shares in the portfolio should be impaired by 5% a week.
Therefore, the method lobbied by pension funds posed several serious problems for them. Let’s imagine the following situation: a pension fund purchased a share for 10 tenge and its price jumped to 1,000 tenge in a year. However, if the market is acknowledged inactive during the year, the fund should depreciate it by 5% a week until its cost reduces to 10 tenge. It should be taken into account that the level of inflation would increase and the price would become outdated; still, the funds have to reduce the price to its initial value. According to Ibrai Irkegulov, his fund lost 40 million tenge over one day because the market in several securities was acknowledged inactive. At the same time, according to the chairman of the Grantum asset management company, Argyn Toktamysov, this problem does not refer to the domestic shares which are offered in the international market. For example, the depository receipts of Kazakhtelecom and Kazkommertsbank do comply with their fair value.
However, as a whole, experts believe that defining a “market price” on the Kazakhstan’s stock exchange is nonsense. Shares are quoted with a wide spread and trades are not regular, i.e. it is impossible to define the fair value by the results of daily trades (as on international markets). According to KASE, less then five out of 90 instruments comply with the active market requirements, with the shares of KazMunaiGaz E&P and ATF Bank being in the five.
Argyn Toktamysov notes another drawback of the method pursued by the FSA. It is possible to estimate the investment value through market maker’s buy quotations even if real trades are not carried out. Taking into account the fact that issuer’s affiliated broker company often plays the role of their market makers, the latter can quote high prices for the shares of their parent companies without real trades being carried out. As a result, depositors would be misled as pension funds holding such shares would give the impression of being attractive.
Thus, the measure aimed at increasing the market liquidity was not ideal. The participants in the pension fund market understand the necessity to develop the securities market; they nevertheless believe that artificially supporting the market can result in considerable losses.
Transit to Respublika
Valyut Transit Bank’s (VTB) bankruptcy led to devastating consequences for its affiliated companies. The licence of Valyut Transit Fund (VTF) was suspended for three months starting on 12February 2007. The nominal yield factor of VTB’s portfolio was 3.25% as of 1 March, and shrank to minus 6.28% after Kazakhstan’s National Bank depreciated a part of VTB’s assets (10% in VTB’s securities worth 3.6 billion tenge).
On 26 March, Premier Asset Management announced undertaking managing Valyut Transit Fund’s assets. A respective agreement was signed among the former, VTF’s temporary management and Temir Bank (a custodian bank). Premier Asset Management was expected to support the liquidity of VTF’s portfolio and ensure the availability of moneys for depositors who would decide to transfer their pension savings to other funds. Over the period of managing VTF’s assets, the company transferred 4 billion tenge to other funds which produced a negative effect on the yield from investments of the remaining depositors. As a result, the FSA aborted VTF’s suspension by revoking its licence. In its turn, the temporary management invited tenders for the remaining deposits. On 1 June, a document was approved to provide details of the winner selection procedure.
It is necessary to note that the clientele of the bankrupt fund was a tasty morsel for all the participants in the pension market. Before the licence revocation, the fund attracted a lot of buyers; however because of unsettled issues with the owners, the fund was not sold.
A newly created Respublika pension fund became the winner, which was not a surprise to other bidders as Resmi Investment House was one of its founders. It is worth noting that Premier Asset Management is a member of this investment house as well. That is why market participants realised that there was a close connection between the licence revocation from one fund and the opening of another. Some pension funds, which submitted their bids, say that they were dismissed without any written notice due to reasons that they do not understand. Others, which refrained from bidding, explain that they decided to ignore the invitation due to insufficient information about the number of deposits and their state. Thus, the winner was selected through a closed procedure, and the last decision was made by the FSA. So far, the number of depositors has been kept secret, even from the winner.
As a result, despite all the difficulties, the number of participants in the Kazakhstan’s pension market remains unchanged. The distribution of forces also remains the same with four pension funds holding over 80% of the market.

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