Agency of the Republic of Kazakhstan on regulation Agency of the Republic of Kazakhstan on regulation andand supervision of financial market and financial supervision of financial market and financial

organisationsorganisations

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

Brussels7 May 2009

2

ContentsContents

1.1.Key Macroeconomic IndicatorsKey Macroeconomic Indicators

2.2.Overview of Pension System in KazakhstanOverview of Pension System in Kazakhstan

3.3.Challenges and Measures UndertakenChallenges and Measures Undertaken

4.4.ConclusionsConclusions

3

1. Key Macroeconomic Indicators1. Key Macroeconomic Indicators

4

Key Macroeconomic IndicatorsKey Macroeconomic Indicators

2009 Forecast:

Inflation rate: 7,9-9,5%Real GDP growth: 1-3%Source: Ministry of the RK on Economy and Budget Planning

Population, economically active population, contributors of pension funds as of January 1, 2009 (mln. of persons)

8,4%

18,7%

5,3%

8,9%

10,7%9,7%9,6%

6,7%7,6%

9,5%

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

14,0%

16,0%

18,0%

20,0%

2004 2005 2006 2007 2008

Real GDP Growth Inflation rate

mln

.

0

2

4

6

8

10

12

14

16

Ряд1 15,8 8,4 6

Population Economically active

populationContributors

Real GDP growth and inflation rates

5

2. Overview of Pension System in Kazakhstan2. Overview of Pension System in Kazakhstan

6

Two Types of Pension Systems Run in Parallel Two Types of Pension Systems Run in Parallel

Besides, there is state basicstate basic pensionpension, paid in addition to payments from the Center and (or) from the pension funds.

Types of Pension SystemsTypes of Pension Systems

Pay As You GoPay 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 ContributionDefined Contribution

For those who started to work after January 1st, 1998.

Payments from pension funds

Mandatory pension Mandatory pension contributionscontributions

(10% of salary but not more than equivalent of 75 “monthly calculated

indicator”)

Voluntary pension Voluntary pension contributionscontributions

7

How the Pension System WorksHow the Pension System Works

Pension FundPension FundAgreement

Mandatory pension contributions(10% of the salary)

State Center forPension Payments

State Center forPension Payments

• Managing integrated database on contributors;• Transfer of mandatory pension contributions to pension funds;• Transfer of pension savings from one pension fund to another by clearing

Pension assets safe-

keeping

Pension assets

management

Pension Assets Management Company

Pension Assets Management Company

Bank Custodian (account of the Pension Fund)

Bank Custodian (account of the Pension Fund)

Contributor

Administration of individual pension accounts of contributors

Mandatory pension contributions(10% of the salary)

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Key Characteristics of the Pension SystemKey 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 women is 58 years, for men is 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

0

200

400

600

800

1000

1200

1400

1600

01.01.2004 01.01.2005 01.01.2006 01.01.2007 01.01.2008 01.01.2009

KZT. bln

7,0

7,5

8,0

8,5

9,0

9,5

10,0 %

Pension savings , KZT bln Pension savings to GDP ratio, %

Pension Savings and Pension FundsPension Savings and Pension Funds

Concentration of pension assets by fund as oConcentration 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)

5,84%

17,29%

13,39%

29,2%

22%

12,74%

0 5 10 15 20 25 30 35

"Pe nsion fund ofKaz akhstan Halyk Bank"

"State pe nsion fund"

"Ular Um it"

"BTA Kaz akhstan"

"Grantum "

O the r 9 pe nsion funds

Pension savings and pension savings to GDP ratioPension savings and pension savings to GDP ratio

10

Payouts 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.

12

15

29

0

5

10

15

20

25

30

KZT bln.

2006 2007 2008

payments from pension funds

11

Pension Savings, Investment Income and Monthly Pension Savings, Investment Income and Monthly Contributions DynamicsContributions Dynamics

Pension savings, net investment income, pension contributions (2005-2009)

484

648,6

909,7

1208,1

1420,5

114,7 155,1255,7

339,3 307380,1

512,4

683,9

912,1

1184,7

0

200

400

600

800

1000

1200

1400

1600

01.01.2005 01.01.2006 01.01.2007 01.01.2008 01.01.2009

KZ

T b

ln.

Pension savings Net investment income Pension contributions

• 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%

Pen

sion

con

trib

uti

ons

chan

ge, p

ensi

on

savi

ngs

ch

ange

KZ

T b

ln.

Decrease of pension savings in October 2008 due to investment income decrease

-60

-40

-20

0

20

40

60

80

01/2008 02/2008 03/2008 04/2008 05/2008 06/2008 07/2008 08/2008 09/2008 10/2008 11/2008 12/2008 01/2009 02/2009 03/2009

0

50

100

150

200

250

300

350

400

450

Pension contributions change Pension savings change Cumulative investment income

Investm

ent in

come

KZ

T b

ln.

Pension savings growth, pension contributions growth, net investment income (01/2008-03/2009)

12

30,85%

10,35%1,65%9,85%

36,49%

8,96% 1,85%

Kazakhstan state securities (30,85%) Corporate securities of foreign issuers (10,35%)

Foreign state securities (1,65%) Shares of Kazakh issuers (9,85%)

Corporate bonds of Kazakhs issuers (36,49%) Deposits in local banks (8,96%)

Others (1,85%)

Pension Funds investment portfolio structure as of January 1, 2009

Portfolio Investment StructurePortfolio Investment Structure

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3. Challenges and Measures Undertaken3. Challenges and Measures Undertaken

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Decreasing value of pension savings due to falling value of

financial instruments

High inflation rate

Growing investment risks

Challenges for Effective Functioning of the Challenges for Effective Functioning of the Pension SystemPension System

Challenges

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High Inflation Rate High Inflation Rate

Nominal rate of return, 60 months

30,00

35,00

40,00

45,00

50,00

55,00

60,00

65,00

70,00

1.1

.07

2.1

.07

3.1

.07

4.1

.07

5.1

.07

6.1

.07

7.1

.07

8.1

.07

9.1

.07

10

.1.0

7

11

.1.0

7

12

.1.0

7

1.1

.08

2.1

.08

3.1

.08

4.1

.08

5.1

.08

6.1

.08

7.1

.08

8.1

.08

9.1

.08

10

.1.0

8

11

.1.0

8

12

.1.0

8

1.1

.09

Nom inal rate of return, 60 m onths Cum ulative inflation rate, 60 m onths

Nominal rate of return, 12 months

-2

1

4

7

10

13

16

19

01

.01

.20

07

01

.03

.20

07

01

.05

.20

07

01

.07

.20

07

01

.09

.20

07

01

.11

.20

07

01

.01

.20

08

01

.03

.20

08

01

.05

.20

08

01

.07

.20

08

01

.09

.20

08

01

.11

.20

08

01

.01

.20

09

01

.03

.20

09

Nom inal rate of return, 12 m onths Cum ulative inflation rate, 12 m onths

%%

Existing system for protection of pension savings Potential problem

State guarantee for pension contributions adjusted for inflation rate (allocated sum from the state budget). The reimbursement is sent to bank accounts of pensioners whose pension savings are lower than amount of mandatory pension contributions considering inflation rate).

Inflation growth or investment income decline lead to a necessity to increase budget spending due to state guarantee.

**In 2009 KZT 3.9 bln. (EUR 19.5 mln.) are allocated in the state budget for payment In 2009 KZT 3.9 bln. (EUR 19.5 mln.) are allocated in the state budget for payment under the state guaranteeunder the state guarantee..

Decreasing Value of Pension AssetsDecreasing Value of Pension Assets

48,28%

17,66%

49,08%

47,73%43,11%

30,19%

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

2001-2006 2002-2007 2003-2008

Nominal rate of return of the fund that failed to sustain minimum level of profitability

Corrected average weighted nominal rate of return on pension assets for all funds

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.)

Existing system for protection of pension savings Potential problem

Sustaining minimum rate of return by means of covering by a pension fund/pension assets management company of the difference in case nominal rate of return of the fund falls below the weighted average nominal rate of return of the pension system for the last 5 years.

Absence of the unified methods to determine fair value of securities in investment portfolio of pension funds as a result of valuing assets in accordance with IFRS

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Increasing Investment RisksIncreasing Investment Risks

The rise of market 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.

KASE Index (2008)

KASE Capitalisation

KASE Index (2009)

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Two Key Laws Adopted Last YearTwo 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.

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Plan of Joint Actions by the Government, Plan of Joint Actions by the Government, National Bank and the Agency for 2009-2010National 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.

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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.

Agency’s Actions on Regulation of Pension Agency’s Actions on Regulation of Pension Funds ActivitiesFunds Activities

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Future stepsFuture 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.

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4. Conclusions4. Conclusions

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ConclusionsConclusions

• 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.

Agency of the Republic of Kazakhstan on regulation and Agency of the Republic of Kazakhstan on regulation and supervision of financial market and financial organisations supervision of financial market and financial organisations

Alina AldambergenAlina AldambergenDeputy ChairpersonDeputy Chairperson

67 Aiteke Bi street, Almaty 050000 Republic of KazakhstanTel.: +7 727 278 80 01Fax: +7 727 272 54 33http://www.afn.kz, e-mail: afn@afn.kz

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