Clare Nuttall in Astana, Ben Aris in Moscow -
Cash-strapped governments across Central and Eastern Europe and the Commonwealth of Independent States (CEE/CIS) are resorting to the desperate measure of raiding the pension piggy bank, which may plug budget deficits now but could leave their OAPs impoverished in a decade's time.
Kazakhstan is the latest culprit, seizing the country's private pension funds at the start of this year. Previously considered to have one of the best organised and run pension systems in the former Soviet Union, the state has effectively nationalised the entire $20bn of assets under management and intends to hand them over the National Bank of Kazakhstan to spend "as it sees fit."
Russia made a similar, if slightly less dramatic move in January, when the Kremlin order the contribution to the investable part of pensioned cut from 6% to 2% of the total, with the difference used to pay current pensions. Russia's private pension sector is still in its infancy after the initial attempts to reform the sector in 2002 were botched, but recently private pension funds have been growing quickly as the emerging middle class wake up to the need to provide for their old age themselves.
Russian private pension fund managers were outraged by the decision, doubly galling as the Kremlin has pushed capital reforms to the top of the political agenda and is making good progress on modernising the stock market. "It's a question of jam today, but gruel tomorrow," says one manager who didn't want to be named criticising the financial authorities. "This was a total short-sighted decision; if the government doesn't start building up resources now, it will not be able to cover its social obligations to retirees in the next couple of decades."
And Hungary is well ahead of everyone else both in stupidity and bluntness. In 2010, the state issued its citizens an ultimatum: move your private pension to the state system or lose it. The grab saw some $14.6bn of privately managed money pour into state coffers that was used to plug a budget deficit hole or invested into public works. "This is effectively a nationalisation of private pension funds," David Nemeth, an economist at ING in Budapest, said in an interview at the time. "It's the nightmare scenario."
In both Hungary and Kazakhstan the appropriations undo more than a decade of work to move citizens into private funds and so wind down the state's obligations to its elderly. In Russia, where the reforms have yet to really start, the Kremlin is strangling the goose while it is still a gosling.
Kazakh pension system crosses the Styx
Kazakhstan's revanchement is maybe the most disappointing, as of all the countries in the former Soviet Union it was a standout success when it came to putting into place sensible and successful financial reforms.
The Kazakh government is planning to scrap the country's existing pensions system, considered the most advanced in the CIS region, and merge the 10 private and one state funds into a single state-controlled fund. This will allow Astana to tap the $20bn worth of pensions assets to maintain economic growth at its targeted 7% and finance infrastructure projects. But this could also be the kiss of death for the country's capital markets.
The idea was first broached by President Nursultan Nazarbayev on January 25. Nazarbayev criticised the use of money from the National Fund, where windfall oil profits are accumulated, in Kazakhstan's recent anti-crisis programmes, saying that there had been "no pay-off" for the $10bn spent. "The pensions and insurance sectors combined hold $3.5bn. Why isn't the money put to use?" Nazarbayev told government officials.
Deputy Prime Minister Kairat Kelimbetov confirmed on February 6 that all pensions savings accumulated in Kazakhstan should be merged into a single national pension fund by July 1, 2013. The fund will be set up on the basis of the existing State National Pension Fund (GNPF), which is owned by the central bank, and holds around 19.3% of Kazakhstan's total pensions assets.
With just four months to go, government officials are still considering how to push through the merger. Kelimbetov indicated in an interview with Interfax in mid-February that the government may attempt to kill two birds with one stone by linking its pensions grab to offloading its holdings in BTA Bank and other commercial banks that are being put up for sale.
Astana wants to start the process by getting the sovereign wealth fund Samruk-Kazyna to buy out the three largest pension funds - Ular Umit, which is owned by BTA, Kazkommertsbank's (KKB) Grantum Pension Fund and Halyk Bank Accumulative Pension Fund (Halyk APF). Astana is considering offering the state's shares in BTA and KKB to the banks in exchange for shares in the pension funds, Kelimbetov told Interfax.
According to Kelimbetov, the government is "very close" to a decision on purchasing shares in the three funds, which together with the GNPF, account for 75% of pensions assets in Kazakhstan.
Merging the GNPF and Ular Umit is an "internal matter" for the government since the GNPF is already under the control of the central bank, and following BTA's second round of debt restructuring in 2012, BTA is 97.26% owned by Samruk-Kazyna. Meanwhile, KKB's shareholders would be able to buy back the 21.26% stake in the bank owned by Samruk-Kazyna, in return for handing over Grantum shares, Kelimbetov told Interfax. The government might also propose to Halyk that the bank takes shares in struggling BTA in return for the Halyk APK pension fund - an idea that is unlikely to be welcomed by Halyk.
Halyk responded to the reports on February 19 with a statement saying that no request had yet been received and it will consider selling or exchanging shares in its pension fund only in the event of a formal proposal. "Halyk Bank has always regarded Pension Fund as a strategic asset of Halyk Group," the statement added.
The decision to raid the pensions pot comes as Kazakhstan's GDP growth slipped to around 5% in 2012, well below the medium-term target of at least 7% a year set by Nazarbayev. With the National Fund strictly reserved for a rainy day (such as the previous crisis), the government has had to look for alternative financing sources. Astana has various ideas including plans for a KZT150bn ($996m) sovereign Eurobond - the first for 13 years - announced by Finance Minister Bolat Zhamishev on January 29. However, these are unlikely to be sufficient for all the government's ambitious investment plans.
Kazakhstan's government and state-owned companies also have massive fund-raising needs for the coming years. Astana's existing infrastructure construction projects run into billions of dollars, and more are set to be announced when the government launches a new industrialisation programme after the 2010-14 programme is completed. State oil and gas company KazMunaiGas needs to finance projects including pipeline construction, and its needs will increase when the next phases of development at Kazakhstan's mega-fields Karaghaganak, Kashagan and Tengiz are agreed.
But although the government is adamant the merger does not amount to nationalisation of Kazakhstani pensions, it appears to be a U-turn on the business-friendly reforms of recent years.
Almaty-based investment bank Visor Capital describes the merger as "a step backwards for Kazakhstan." The brokerage warns in a statement that, "we believe the pension funds reform will have a very negative impact on the development of capital markets in Kazakhstan. Most private pension funds will be closed or in a best case will lose most of their assets under management, and a large number of other professional participants in the market (ie. about 30 active brokerage and asset management companies) will shut down. And the remaining market participants will - we believe - reduce their staff significantly."
Since the switch to a mainly funded system in 1998, Kazakhstan's pensions system has gained a reputation as the best in the former Soviet Union. Kazakhstan now has total pensions savings of $20.7bn, around 10% of GDP, putting the country well ahead of Turkey (2.3%), Russia (3.0%), and even the Czech Republic (6.3%), and only slightly behind Poland (on 15.6%).
The impact of switching from a mainly private to a state pension system does not necessarily mean a worse outcome for Kazakhstan's future pensioners, as it remains to be seen what the return on investment will be from the planned infrastructure investments. Workers will, however, lose the freedom they currently have to choose between 11 funds, which acted as an incentive for fund managers to perform.
Renaissance Capital analyst Gennadiy Babenko says the new system may not represent as big a change as feared, since the funds already invest primarily into Kazakhstani government bonds. "The idea behind Kazakhstan's pensions system was perfect, but they ended up with pension funds mainly invested into state-issued bonds, which didn't yield much," Babenko tells bne. "In effect, the pension funds are already financing the local government and getting quite low returns."
The biggest losers from the new regime are Kazakhstan's brokers. Since pension funds are the single largest investors on the local market, their merger into a single state fund is set to devastate the domestic capital market, and cut off one of the most attractive avenues for private Kazakhstani companies to raise finance.
The process has already stated with the introduction of new rules banning pension funds from investing into all but a handful of instruments. Many brokers say this will force them to shut up shop even before the funds are merged. This is an apparent U-turn for Astana, where until 2012 officials were talking about broadening the range of instruments pension funds could invest into in an attempt to increase their potential returns and boost activity on the Kazakhstan Stock Exchange (KASE). "Pre-merger, the pension funds have already been instructed not to invest into any other instrument than government or quasi-government securities, which has already translated into missed opportunities for local companies," says Jean-Christophe Lermusiaux, head of research at Visor Capital. "Successful emerging markets countries usually have a powerful local stock exchange, but if non-Government related Kazakhstani companies want to raise money they will have to do it somewhere else."
Had the new rules come into effect in late 2012, they would have prevented the IPO of Kcell, one of the most successful in Kazakhstan's history, from taking place. The mobile operator carried out a dual listing in London and Almaty in December 2012, raising $525m. Kazakhstani companies are required to place at least part of their offering on the KASE when listing abroad, but Kcell would not have been able to do so under the new rules.
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