Prospects and public concerns in the pension fund’s new investment guidelines

The Georgian Pension Agency released a long-awaited document at the end of September, spelling out the process by which the fund will determine how to invest its resources, and how to best protect its contributors’ hard-earned cash.

The document was developed over the period of a year and a half by the Investment Council of the Pension Agency, which says the ultimate goal of the guidelines is to combat inflation.

The agency, which as of early October is managing about 1.1 billion GEL in funds, has about 70% of its assets in deposit certificates with an effective annual interest rate of 11.1% and a term of five years.

This is still a ways off: until 2023, the Pension Agency will only invest in low-risk investment portfolios, which at this stage means mostly commercial bank deposits.

Come 2023, however, pension plan enrollees will be able to exercise their risk appetite, and choose between low, medium and high-risk portfolios, defined by the new guidelines.

The document has also set out a so-called “three-line protection principle,” detailing how the fund’s resources are protected from excess turbulence and bad decision-making.

Goga Melikidze, Senior Investment Officer of the Investment Council of the Pension Agency, defines the three lines of risk control and protection as follows:

“The first line is the investment service itself, which is responsible for investment and the management of operational risks arising in the process. The second line is the chief risk officer, who independently, continuously checks the compliance of the investment portfolio and transactions, and the audit service, as the third line of protection, gives a completely independent assurance that the investment office and the chief risk officer are working properly,” says Melikidze.

The document also sets out the requirements to be met by financial institutions or financial instruments in which citizens’ savings can be invested.

For example, the funds accumulated in the pension fund may not be invested in a company without a specific international rating and financial instruments must have a credit rating assigned by at least one global rating agency (Standard & Poor’s, Moody’s, Fitch Ratings, Scope Ratings).

In addition to the various layers of internal control, in 2021 the Agency is introducing a “specialized depository” which will be responsible for overseeing investment activities and ensuring the safekeeping of pension assets.

According to the state procurement website, three financial institutions are competing for the status of the specialized depository: TBC Bank, Bank of Georgia and the Central Depository of Armenia.

The former director of the Pension Agency, Levan Surguladze, who resigned last year saying he would “pray for the fund” and whose history includes top positions in Wall Street at major international banks such as Deutsche Bank, Barclays and UBS running funds and heading risk control, has a different take on the risk-control mechanisms specified in the document, telling Investor.ge that the investment policy document “completely confuses the functions of risk control.”

“Initially, the structure of the Pension Agency provided for independent risk-control mechanisms and it was approved by the Supervisory Board, but unfortunately this structure has been completely changed and practically abolished. This document doesn’t reflect independent risk control at all. On the contrary, it mentions that it has become dependent under one vertical.

This is absolutely impermissible and does not comply with any international standards,” Surguladze says, noting it would be better for the specialized depositary to act as the agency’s central depository, since the creation of a separate department will only create additional expenses for the pension fund.

“I think this extra expense for the pension fund will be an unnecessary and pointless expense that will burn the fund, and therefore have to be paid out of people’s pocket,” Surguladze explains.

Other experts question the document’s ability to gain the trust of the population, due to concerns about high inflation and currency risks characteristic of the Georgian economy.

A lack of predictability in the investment environment makes it difficult to estimate an expected return, some experts say, noting this question of reliability will become especially relevant once consumers face the choice (from 2023) of where to place their savings. Moreover, for this scheme to work, the population needs to enter this phase of the pension scheme with a much higher degree of financial awareness in order to properly understand the risks associated with each portfolio and make an informed decision.

Therefore, the Pension Agency and the National Bank will have an important role in this process in providing as much information as possible to pension-fund enrollees and winning public trust.

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