The “breakdown threshold” implies capital adequacy of an AMC needed to cover its obligations before trustors in case of negative revaluation of pension savings and/or pension reserves under management.
By ACRA’s estimates, the real “breakdown threshold” for most of AMCs involved in managing pension savings and/or reserves (excluding liabilities to other trustors, such as insurance companies, endowment funds, unit holders, etc.) equals to 6-9% of pension assets value under their management (Figure 1).
Even ruling out credit risk and market liquidity risk and taking into account only market risks, stress testing of assets that make up pension savings and reserves, has shown that negative revaluation of pension assets at the end of the management period will not exceed 5%, in which case seven out of ten AMCs listed in Table 2 will be able to compensate losses. Their number will drop to just three, if negative revaluation reaches 10%, while a 20% barrier proved to be insurmountable for all largest players on the Russian collective investments market.
That said, the Russian stock market is prone to much stronger fluctuations during the year, which potentially can make the aforementioned negative scenario reality. Conducting its research ACRA has analyzed volatility of various pension savings indices at Moscow exchange for time ranges 2008-2015 and 2010-2015 in order to eliminate the effect of the crisis and post-crisis years (Table 1).
Volatility of the indices suggests that the negative scenario is statistically probable. If it is realized, the majority of AMCs will not be able to fulfill their obligations pertaining to the minimal guaranteed yield.
Minimal guaranteed yield is understood as guarantees and obligations assumed by an AMC before its key trustors regarding redemption of their losses and ensuring a certain yield in case of realization of a negative scenario on the stock market.
The Russian pension system is unique in terms of the role played by pension funds. Taken as a whole, the latter act as an accountant institution that distributes the returns from pension assets management to accounts of insured persons and/or investors, while being also responsible for the results of portfolio management, but not being able to manage investment risks.
The fact is that, according to the law, NPFs are obliged to invest pension savings and a greater part of pension reserves through AMCs, which in turn include a clause in trust agreements that shifts all credit and market risks that may jeopardize the value of assets under management back to trustors, i. e. the NPFs.
The key rationale for such practice lies in a systemic risk of the stock market and AMCs’ inability to cover losses with their own funds. As a result, almost any minimum yield guarantee poses an unfulfillable obligation, as AMCs’ own capital is incomparable with the amount of funds they manage.
In Table 2, ACRA presents a leverage analysis of the largest AMCs managing pension funds and reserves (excluding liabilities to the other trustors listed above).
Even if AMCs’ own funds are enough to cover losses incurred in the course of pension assets management, there is a legal problem of interpretation of the safeguarding principle applicable to securities entrusted by NPFs to AMCs, as the term “securities safeguarding principle” has not yet been defined by the law.
The situation is complicated by the fact that whatever position the stock market regulator sticks to, this will cause problems one side or another. If safeguarding implies a physical safety of securities, not of their value, then NPFs will find it more profitable to manage their assets on their own, i. e. no longer having the need to hire “irresponsible” AMCs, pension funds will be able to provide higher yields to accounts of insured persons and investors. On the other hand, if the law attributes the safeguarding principle to the value of securities, this would immediately raise the question of recapitalization of AMCs and, consequently, would pose a threat of a sharp squeeze of the trust management market.
According to ACRA, all of the above scenarios will end up with contraction of the Russian collective investments market, which in turn will ease competition between NPFs and AMCs and will negatively impact both, opportunities for end users to choose professional market participants (NPFs and AMCs) and the overall liquidity of securities traded on the Russian stock market.
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