UAPF: Why Manually Allocating Pension Money Is Inefficient

The UAPF and its money

A funded pension system moves away from the pay-as-you-go model and rests on the principle that every citizen saves for his or her own old age. To make sure people actually save enough and do not later turn to the state for money, contributions to the pension fund were made mandatory. Ten percent of wages goes into the pension fund.

Previously, the money went to private pension funds regulated by the state. Special investment rules were drawn up, and each fund had an investment declaration that was supposed to protect pensioners from risky assets.

Most of the money was invested in bonds of local companies and in deposits.

Often, pension funds were created within banks and, naturally, they served as a solid source of funding for those same banks.

Many managers of such funds gambled and placed money in not entirely reliable financial instruments. Some won, others lost. Any pensioner who was unhappy with a fund could move to another one: one with higher returns, or lower volatility, or state participation. In short, there was a right to choose.

Then, under the banner of protecting pensioners, all the money was gathered in a single fund, which was called the UAPF (Unified Accumulative Pension Fund).

Now pensioners have no choice: all the money is managed by the UAPF. Wherever it sends the money, that is where it will sit.

It might be a bank rated CCC, or tenge deposits just before a devaluation, or foreign currency just after one. Anywhere at all. And now a pensioner cannot express no confidence in it by moving to another pension fund, nor will a shareholder punish it, because the shareholder is the one deciding where to put the money.

The question is whether manual allocation of money is efficient for the economy.

Anyone who has studied even a little macroeconomics knows that pension funds never kept cash in a safe. They always placed it in the country's economy through bonds, deposits and account balances.

The difference is that the decision to invest in a particular asset was made by professionals who knew that if there were no returns, their clients would leave, and if there were no profit, the owners would replace them with others. And money invested in the right companies has a larger multiplier effect, because it has landed in the right hands.

Now UAPF money is redistributed into government securities to finance the budget deficit, into the quasi-public sector to plug holes and pay off loans, and into banks that were suffering an acute liquidity shortage (ratings do not matter). And now it has been decided to hand out another KZT 200 billion to 30 banks to finance SMEs.

The main criterion is a bank's creditworthiness. The methodology used to assess it is unknown, and so far it is also unknown who will get how much.

In any case, the allocation of UAPF money now follows the principle not of efficiency but of necessity and proximity to power.

From an economic standpoint, moreover, the amount of money in the economy will not increase. There will simply be a redistribution of resources, nothing more.