Finance

The Best Years

Pension Funds

As the authorities fervently discuss the creation of a single state pension fund to replace the existing funds by August 2012, new asset managers are stepping in to oversee the […]

As the authorities fervently discuss the creation of a single state pension fund to replace the existing funds by August 2012, new asset managers are stepping in to oversee the reforms. The proponents of the new legislation are expected to bring about consolidation that will lead to higher returns and safer investments in a much easier business environment.

However, opponents of the new plan argue that foreign management may be against the interests of the country, leading to an eventual leakage of funds abroad. The lack of competition, which hampers companies’ incentives to outperform each other, is another issue that concerns opponents of consolidation. Having endured a painful transition into a market economy, Kazakhstan’s pensions system is beginning to adapt. Yet, low yields and restricted investment options are obstructing the development of the sector. Be it through further consolidation or more liberalization, Kazakhstan’s pensions scene will see further reforms in the near future to make the best of the $17 billion generated for asset management. Through new pensions programs, Kazakhstan will accelerate the development of the country and open new channels for investment.

Kazakhstan inherited its pension system from the former Soviet Union, where the pension fund allocated from the state budget covered old age, invalidity, survivors, and social pensions. 80% of the fund’s beneficiaries were old-age pensioners, and 25.5% of the wage bill was allotted for mandatory contributions to the pension fund; no further contributions from the employees were required.

The system was based on three pillars. Firstly, employers pay a 15% payroll tax. Secondly, employees contribute 10% of their wage as a part of a defined-contribution scheme, into their choice of 11 pension funds, 10 of which are private. Lastly, employees can adopt voluntary additional schemes to increase their benefits.

In the aftermath of the Soviet Union’s demise, the pensions system faced severe financial constraints and by end-1996 veered toward bankruptcy. Consequently, the government enacted the “Law on Pension Provision in the Republic of Kazakhstan” in 1998, which made Kazakhstan the first CIS country to adopt a cumulative pension system. “The main reason for the introduction of the new pension system was the fact that… the state was not able to pay pensions on time, and the payments could be delayed up to six months,” Daulet M. Sahipov, Chairman of the Board of pension fund Ular Umit, told TBY in an interview. “At that time, the system’s total debt amounted to $500 million, which was big enough to distort the country’s budget.”

Today, pension funds in Kazakhstan have varying degrees of profitability, and inflation seems to be the greatest challenge. In 1Q2012, four of the 11 available funds lost $23.8 million, while the earnings of the others exceeded $40.8 million. Only the state Accumulative Pension Fund yielded earnings with a rate higher than inflation (5.26% versus 4.8%) over a period of 12 months. “For the last five years, the average rate of inflation was 57.41%, which means that since 2007, the local currency devalued… the weighted average cumulative return on pension funds investments was 27.77%,” Sahipov explained. “The last global financial crisis highly affected the portfolios of pension funds in a negative way and created substantial losses in pension funds balances.”

Creating the favorable conditions and the right framework for investing pension funds into profitable projects, especially as part of a private-public partnership (PPP) model, is an important agenda item not only for establishing a more diversified yield generation for the funds, but also for creating alternative financing schemes that will benefit the development of infrastructure, industry, and the overall economy.

Recent developments and evolution away from the Soviet model are paving the way to a system that supports and encourages users and potential investors. Should the consolidated state pension system be implemented in August 2012, Kazakhstanis from every walk of life can expect to discover new opportunities and enjoy better benefits over the long term.

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