TIMELY COMMENTARY: Pension system modernization in Kazakhstan carried out to ensure safety of deposits and increase their profitability


TIMELY COMMENTARY: Pension system modernization in Kazakhstan carried out to ensure safety of deposits and increase their profitability– Recently in the Kazakh society actively is being discussed the Government’s plans to modernize the funded pension system. In this case there is no consensus developed on the part of the public, nor the expert community. Moreover, ordinary citizens and the experts often tend to negative assessments of the measures, calling them “anti-popular” and explaining the government’s desire to reduce the cost of state budget, in particular, by increasing the retirement age for women.

Provided a specially designed bills creation of a single age pension savings looks as the intention to use accumulated pension funds for public use, that is, as the nationalization of pension funds.

Presentation of the draft Law “On Pension Provision in the Republic of Kazakhstan” held at the Parliament as amended and related amendments to the existing legislation was in many media insufficiently objective, with emotional lighting, giving no clear picture of the purpose of ongoing modernization of the pension system.

The main innovation of the government bill is the creation of a unified pension fund (UPF), which is the only organization involved in raising the mandatory pension contributions. The decision to create the UPF is due to a number of objective reasons relating to, first of all, the lack of transparency of existing pension funds and low investment income on depositors’ funds. In particular, as shown by analysis, APF (accumulative pension fund) has different disorders, for example, the existence of “false accounts” bloated administration costs for low yields and others. In the Unified Pension Fund, which will be managed by the National Bank on the basis of agreement between the National Bank, the Government and the UPF conditions for violations will be eliminated. In addition, by centralizing there will reduce administrative costs, which will contribute to the safety of deposits and increase their profitability.

Draft legislation also provides for improvement of the investment strategy, the choice of the list of approved tools for the UPF asset allocation will be implemented by the UPF Council on the management of pension assets under the President of Kazakhstan. The UPF maintains the system of individual accounts of depositors, and the compulsory pension contributions will be distributed on the security guarantees of the state pension funds. Thus, fears that the government takes away pension funds are unreasonable, on the contrary, the measures have been dictated by the desire to ensure the safety of deposits and increase their profitability, that is, concern for the welfare of Kazakhstan.

Interagency working group of the government made a number of proposals for expanding the coverage of the population with the funded pension system, the transition from voluntary to mandatory professional contributions, as well as raising the retirement age for women.

The greatest impact in the community has had the issue of increasing the age to women’s retirement – up to meetings and petitions against this innovation, the activists organized labor groups and some unions. In this case, the government’s arguments are not taken into account, although the explanations have been given in some detail.

In particular, as explained by Labor and Social Security Minister Serik Abdenov, last year, 12 percent of women who were retiring, did not have full employed service accumulated as of January 1, 1998, and by 2018 the retired women will face incomplete length of service. This means that women’s pensions, retiring after 2018 will include a basic pension, joint retirement from the budget, the appropriate work record before January 1, 1998. At the same time the size of the retirement pension may be below the annual minimum pension because of not full employment history. In addition, women’s pension will include a contributory pension from the funded pension system in a relatively small amount corresponding to its pension funds. It is expected that women’s pension will be less than 40 percent of the average monthly wage in this decade. Therefore, unification of retirement age is planned to increase the length of women’s participation in the pension system and increase retirement savings, and to increase the size of the pensions received by women from pension funds.

In addition, the increase in the retirement age for women aims at leveling the growth dependency ratio due to the aging generation of citizens born in the postwar years. Due to the extension of working age opportunities in the labor market involvement of additional manpower are expanding. But the government is not going to limit itself only by increasing the retirement age for women, it provide subsidies for compulsory pension contributions during the period of maternity leave and child care. That is, into account has been taken important social function of women and the conditions will be created for ensuring sufficient amount of their retirement savings and, consequently, the amount of their pensions.

It should be noted that the unification of the retirement age is not unusual: in 18 countries of the European Union there is a plan to equalize the retirement age of women with a pension age of men as early as 2020, only in some EU countries they are not going to raise the retirement age for women. In most countries there will be a phased increase in the retirement age. In Kazakhstan, as Deputy Prime Minister Kairat Kelimbetov informed during the presentation of the bill in the Majilis of the Parliament, the retirement age for women will rise for 10 years – from January 1, 2014, i.e. six months a year. In general, increasing the age of retiring for both men and women is a common trend in the developed countries due to their socio-demographic characteristics: declining fertility and growing life expectancy, which leads to the step-up in the proportion of pensioners among the population.

The modernization of the pension system also includes a set of measures to improve employment and job retention for women approaching the retirement age.