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“The main problem Kazakh pension funds face today is a lack of financial instruments” Issabayeva Gaini, Halyk Pension Fund |
Pension fund assets had reached $6.528 billion by October 2006. Halyk’s fund is the largest with total pension assets of about $1.8 billion. Pension fund investments in Kazakhstan have to follow strict regulations and maintain highly conservative portfolios, with a minimum of 15% invested in government bonds, not more than 50% in corporate securities, and not more than 40% in foreign assets, with an expectation that most of this is in AAA-rated assets.
Funds invest primarily in fixed-income instruments because of these restrictions.
However, Alisher Djumanov, managing director of Ansher fund management, says: “I think this will be a problem going forward. If you look at the interest rates and the yields on the domestic fixed income instruments, they are relatively low. The government needs to allow pension funds to increase equity market allocations to avoid underperformance.”
In early 2006, JPMorgan and Merrill Lynch each issued standard bonds of $100 million in tenge as the government debt was restructured. Other foreign banks have issued bonds in tenge on the international markets, but JPMorgan opted to issue on the local exchange. Over 90% of pension funds invest in local currency to avoid exchange risk, but this highlights the lack of available vehicles to invest in.
The ministry of finance issues special government bonds for pension funds that guarantee yields in line with inflation. By law the government is obliged to support funds and so there is a hope that special bond issues will occur in larger volumes as the funds increase in size. But, says one local banker: “The government is not interested in borrowing money because oil prices are high and its finances are very strong.
New legislation from the regulator, the RFCA, could improve the situation. From January 1, as Arken Arystanov, chairman of the RFCA explains: “Pension funds will have their regulations relaxed. Members will be able to choose the investment strategy, and risk levels, of their pension. Before the government automatically decided.
Plans are also afoot to promote the to-date limited derivatives market. Currently, pension funds can use derivatives such as options, futures and swaps, but they are only allowed to hedge 50% of the instrument. “We know the agency plans to allow 100% hedge, which will open many investment doors,” says Gaini.
But, what is possible and what is culturally realistic are two different things. Many Kazakh pension funds today follow the guiding principle of avoiding risk at all costs. Attitudes need to change as much as the legal environment. As one banker says: “You aren’t going to change an investment manager into a derivatives expert overnight.”
