Expanding Opportunities to Manage Pension Savings – Maria Khadzhiyeva
A NEW APPROACH TO PENSION ASSET MANAGEMENT
Currently, share of private management companies in pension assets (65.1 billion KZT) is significantly less than that of the National Bank of the Republic of Kazakhstan (22.5 trillion KZT) and makes around 0.3%.
In this connection, professional market participants have come up with new approaches to revising the pension asset management system in order to make more appealing the product for transfer of pension assets to private management and to increase flexibility in management of pension assets. Within this approach, market participants offered to take into account market indicators of profitability in line with international standards.
The suggested approach involves changing the system of compensation for negative difference between profitability of pension assets received by management companies and minimum profitability indicator based on a market indicator – a composite index for each portfolio. This composite index includes indices of the Kazakhstan and global stock markets, which expands the opportunities for investing the pension assets and allows the use of strategies geared towards international asset managers.
Under the new approach, investors will be able to choose different strategies from different managers, each of which will have a certain level of risk, return and investment period. This will allow managers to create different investment strategies that correspond to preferences and risk appetite of the investor.
REVIEW OF THE MINIMUM LEVEL OF RETURN
Currently, calculation of return rests on weighted average of all investment portfolio managers (IPMsd). As a result, IPMs with the largest assets have the greatest impact on overall return, which does not always reflect the real state of individual portfolios.
Moreover, the current system of compensation for negative difference in return, applied in the short term, limits the opportunities for more flexible and efficient asset management. This approach often forces management companies to use more conservative strategies, which limits the possibility of obtaining high returns on long-term investments.
Thus, the new approach is designed to increase flexibility of the system and improve investment of pension assets, and will also take into account various investment strategies among investment portfolio managers, which is in the interests of investors and creates more competitive conditions in the market.
DEVELOPMENT OF A NEW APPROACH TO THE MINIMUM LEVEL OF RETURN
In 2023, a task group was formed at the Agency. It included representatives of the Agency, the National Bank of the Republic of Kazakhstan, the Association of Financiers of Kazakhstan, Unified Accumulative Pension Fund and pension asset managers. The task group developed a new approach based on market benchmark indicators. As part of implementation of this approach, a regulatory legal act was developed to revise the minimum level of return.
To date, the draft regulatory legal act has passed the stage of public discussion and is at the stage of approval with the authorized public authorities and will be approved after all relevant approval procedures are passed.
COMPOSITIVE INDEX
Within the new approach, a composite index will be established that includes various global indices, as well as Kazakhstan’s indices of stocks and government securities. Accordingly, when investing the pension assets, IPMs will have the opportunity to buy bonds, stocks, government securities included in these indices, as well as ETFs on these global indices. For debt securities, the credit rating must not be lower than investment (BBB-). Given that the instruments included in the global indices are denominated in foreign currency, it is also planned to increase the investment limits in foreign currency.
It should be noted that IPMs will be able to develop their own investment strategies through a combination of the instruments included in the above indices. The investment of IPM pension assets will be carried out given the specifics of the selected investment strategy.
Along with that, the current approach to reimbursing the IPMs from their own capital for the negative difference between the nominal yield of the investment portfolio of pension assets and the minimum level of yield will not change.
It should be noted that the existing laws of the Republic of Kazakhstan for pension asset managers has established increased requirements for adequacy of equity capital, which increase proportionally to the growth of pension assets under management.
TRANSFER OF PENSION SAVINGS TO PRIVATE MANAGEMENT
People in Kazakhstan can transfer up to 50% of their pension savings to pension asset managers. All investors whose pension savings are under trust management of private management companies will be able to take advantage of the new approach.
In order to transfer pension assets to the trust management of the IPM, the investor must submit an application to the Unified Accumulative Pension Fund (UAPF) to select a management company.
As a result of implementation of the above approaches, an increase in the long-term profitability of pension assets under management of private managers is expected when they use composite indices with a higher income as an indicator of minimum profitability compared to the weighted average nominal profitability coefficient with a short-term horizon.
Switch to composite indices in assessing the activities of pension asset managers will allow managers to expand and diversify investment instruments and develop a strategy for investing pension assets geared towards global asset managers.
Photo source: Senate of the Parliament of the Republic of Kazakhstan