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Kazakhstan Pension System in Times of Crisis: Challenges and Measures Undertaken

Agency of the Republic of Kazakhstan on regulation and supervision of financial market and financial organisations. Kazakhstan Pension System in Times of Crisis: Challenges and Measures Undertaken. Brussels 7 May 2009. Contents. Key Macroeconomic Indicators

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Kazakhstan Pension System in Times of Crisis: Challenges and Measures Undertaken

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  1. Agency of the Republic of Kazakhstan on regulation andsupervision of financial market and financial organisations Kazakhstan Pension System in Times of Crisis: Challenges and Measures Undertaken Brussels7 May 2009

  2. Contents • Key Macroeconomic Indicators • Overview of Pension System in Kazakhstan • Challenges and Measures Undertaken • Conclusions

  3. 1. Key Macroeconomic Indicators

  4. Key Macroeconomic Indicators Real GDP growth and inflation rates Population, economically active population, contributors of pension funds as of January 1, 2009 (mln. of persons) mln. 2009 Forecast: Inflation rate: 7,9-9,5%Real GDP growth: 1-3% Source: Ministry of the RK on Economy and Budget Planning

  5. 2. Overview of Pension System in Kazakhstan

  6. Types of Pension Systems Pay As You Go For those who have had work experience of not less than 6 months before January 1st, 1998. Payments are from the state budget through the State Center for Pension Payments Defined Contribution For those who started to work after January 1st, 1998. Payments from pension funds Mandatory pension contributions (10% of salary but not more than equivalent of 75 “monthly calculated indicator”) Voluntary pension contributions Two Types of Pension Systems Run in Parallel Besides, there is state basicpension, paid in addition to payments from the Center and (or) from the pension funds.

  7. Bank Custodian (account of the Pension Fund) Pension Assets Management Company How the Pension System Works Mandatory pension contributions (10% of the salary) Mandatory pension contributions (10% of the salary) State Center for Pension Payments • Managing integrated database on contributors; • Transfer of mandatory pension contributionsto pension funds; • Transfer of pension savings from one pension fund to another by clearing Pension Fund Agreement Administration of individual pension accounts of contributors Contributor Pension assets safe-keeping Pension assets management

  8. Key Characteristics of the Pension System • State guaranty for pension contributions adjusted for inflation rate; • Mandatory participation (rate of mandatory pension contributions – 10% of salary); • The right of a contributor to make voluntary and voluntary professional pension contributions; • State regulation and licensing of the pension system intermediaries: pension funds, pension assets management companies, bank-custodians; • Responsibility of pension funds and pension assets management companies to provide minimum rate of return (on mandatory pension contributions); • Limited size of fees (not more than 15% on investment income and 0,05% of pension assets); • Contributors are not allowed to use their pension savings before retirement (retirement age for womenis 58 years, for menis 63 years). Upon retirement the pensioner may withdraw not more than KZT 296 000 (approximately EUR 1 480) lump sum each year or in accordance with payment schedule; • Pension fund participants cannot transfer its savings from one pension fund to another more than two times a year.

  9. Pension Savings and Pension Funds Pension savings and pension savings to GDP ratio Concentration of pension assets by fund as of January 1, 2009 • As of January 1, 2009: • Pension funds: 14 • Pension assets management companies: 13(9 out of them are pension funds) • Total capital of pension funds:KZT 47,7 bln. (EUR 280,4 mln.) • Individual pension accounts: 9 613 112 (mandatory), 45 529 (voluntary) • Pension savings: KZT 1 421 bln (EURO 8,3 bln.) • Pension savings per contributor: KZT 350 000 (EURO 1 750)

  10. Payouts In 2008: Payments from pension funds composed 2% of the amount of pension savings. At the same time pension assets growth amounted to 17%. KZT 303 mln. (out of KZT 29 bln.) were transferred to insurance companies under pension annuity contracts (0.2% of pension savings). In 2007: Payments from pension funds composed 1.2% of the amount of pension savings. Pension assets growth amounted to 33%. KZT 32 mln. (out of KZT 15 bln.) were transferred to insurance companies under pension annuity contracts (0.03% of pension savings). In 2007: Payments from pension funds composed 1.3% of the amount of pension savings. Pension assets growth amounted to 40%. KZT 110 mln. (out of KZT 12 bln.) were transferred to insurance companies under pension annuity contracts (0.12% of pension savings). As of January 1, 2009 KZT 448 mln. (0.3% of pension savings) were transferred to insurance companies.

  11. Pension Savings, Investment Income and Monthly Contributions Dynamics Pension savings, net investment income, pension contributions(2005-2009) • average annual pension savings growth (2005-2009): 31% • average annual pension contributions growth (2005-2009): 33% • average annual net investment income growth (2005-2009): 31% Pension savings growth, pension contributions growth,net investment income (01/2008-03/2009) Pension contributions change, pension savings changeKZT bln. Investment incomeKZT bln. Decrease of pension savings in October 2008 due to investment income decrease

  12. Portfolio Investment Structure Pension Funds investment portfolio structure as of January 1, 2009

  13. 3. Challenges and Measures Undertaken

  14. Challenges for Effective Functioning of the Pension System High inflation rate Decreasing value of pension savings due to falling value of financial instruments Challenges Growing investment risks

  15. High Inflation Rate % % *In 2009 KZT 3.9 bln. (EUR 19.5 mln.) are allocated in the state budget for payment under the state guarantee.

  16. Decreasing Value of Pension Assets Reimbursement of minimum nominal rate of return difference by pension fund For the first time since the introduction of defined contribution private pension system at the end of 2008 one of the largest pension funds experienced deviation of its nominal rate of return for 5-year-period below weighted average rate of return of the pension system and covered the difference in the amount of KZT 5.9 bln. (EUR 29.5 mln.)

  17. Increasing Investment Risks KASE Index (2008) KASE Index (2009) KASE Capitalisation • The rise ofmarket risks: • (interest rate risk, price risk, currency risk, liquidity risk) • falling of share prices; • reduction of the value of bonds as a result of credit risk increases (reduction of issuers’ credit ratings); • risk of corporate issuers defaults.

  18. Two Key Laws Adopted Last Year • Legal act aimed at improvement of financial solvency of pension funds and pension assets management companies adopted on October 23, 2008. • Novations: • The Agency was given authority to take measures to pension funds and pension assets management companies and its shareholders before actual deterioration of its financial situation, including measures to increase capitalization, to restructure investment portfolio, to strengthen shareholders’ responsibility. • Legal act aimed at further development of collective investment schemes and pension funds adopted on November 20, 2008. • Novations: • A contributor has the right to choose one of the three investment strategies (aggressive, moderate or conservative) from 2012; • Exclusion possibility to have several pension accounts according to mandatory contributions scheme opened for one contributor by clearing through the State Center for Pension Payments.

  19. Plan of Joint Actions by the Government, National Bank and the Agency for 2009-2010 • Goal: • Mitigation of negative consequences of global financial crisis and economic downturn. • Measures to be taken on pension system of the Republic of Kazakhstan: • Pension funds prudential regulation enhancement by estimating capital adequacy taking into account risks connected with investing pension assets; • Annual allocation in a state budget the amount sufficient for covering the difference between actually paid mandatory contributions considering inflation rate and pension savings at the moment of acquisition by the contributor his or her right to receive pension payments; • Increase of amount of the pensions (provided by pay-as-you-go system) and wages by 25% in 2009-2010.

  20. Agency’s Actions on Regulation of Pension Funds Activities • With the purpose to insure safety of pension savings and reduce investment risks: • More conservative pension assets investment policy was established (minimum limit of share of pension assets invested in Kazakhstan government securities; 10% limit on investing pension assets in financial instruments of one issuer); • Requirement to form reserves (provisions) on possible losses related with securities depreciation was established; • Additional restrictions on transactions with pension assets and own assets of pension funds were introduced (e.g. restrictions on concluding transactions with affiliates); • Possible changes in methods of pension assets valuation were considered, including application of mark-to-market valuation. • With the purpose to improve awareness of the pension funds contributors: • Obligation of pension funds to provide at the request of an investor information on structure of the pension fund’s investment portfolio with specification of each financial instrument; • Requirements on information about pension savings of contributor, provided annually and at the request of the contributor at date.

  21. Future steps • To determine fair value of the financial instruments in current conditions of increased volatility of prices on financial instruments. • To capitalize pension funds from its’ own sources with the purpose to form provisions depending on the level of investment risks of financial instruments acquired on account of pension assets. • To introduce conservative investment portfolio for pensioners and those who are close to retirement age. • To establish state management company for managing pension assets of liquidated pension fund. • To strengthen risk-management system. • To increase the role of contributors in a process of managing their pension savings by choosing investment strategy.

  22. 4. Conclusions

  23. Conclusions • Functioning of the pension system should not be affected by temporary problems. • Pension system is an important investment resource for the economy of a country. • The investment policy of pension funds should be based on diversification principles with building portfolios according to age of pensioners whereas investment strategy should consider an optimal balance between risks and return. • The contributor should have an access to all information necessary to make a proper decision on choosing the fund and pension assets investment strategy. • Provision of the state guaranty of mandatory pension contributions considering inflation rate is a part of realization of state social policy in respect to pensioners.

  24. Contact Details Agency of the Republic of Kazakhstan on regulation and supervision of financial market and financial organisations Alina Aldambergen Deputy Chairperson 67 Aiteke Bi street, Almaty 050000 Republic of Kazakhstan Tel.: +7 727 278 80 01Fax: +7 727 272 54 33 http://www.afn.kz, e-mail: afn@afn.kz

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