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The UAPF executive: pension contributions are intended to ensure comfort in old age

Several basic types of pension systems have been formed in the world: PAYG (when pensions are paid to the current generation of pensioners from the taxes of people currently working), Defined Contribution (when people take care of their future pensions themselves and make contributions to pension funds on their own when they start working) and Combined, which is based on various combinations of the two previous systems. The latter operates in Kazakhstan, which has been originally built on the basis of the Chilean model. It includes state pension with seniority before the reform, basic pension and mandatory funded pension. The reform of the pension savings system was announced last year, and the citizens got access to the use of funds accumulated in the UAPF for various needs. Now, according to experts, Kazakhstan's pension system has begun to migrate from the Chilean model to the Singaporean one. The UAPF executive Zhanat Kurmanov has told the LIFE INSURANCE portal how true such statements are, in which direction the domestic pension coverage is moving, and how reliable this system is.
The UAPF executive: pension contributions are intended to ensure comfort in old age

- What are the most balanced pension systems in the world? How to balance the interests?

- An international rating, the global pension index MCGPI (MCGPI is a joint research project of the CFA Institute and international professional consulting company Mercer Consulting (Australia) is annually formed, which compares the pension systems of developed countries by over 50 indicators. It determines the adequacy, sustainability and integrity of each system.

The Top 10 includes countries with a mixed type of pension system (with a certain predominance of a pay-as-you-go or defined contribution component). Top 10 MCGPI are Netherlands, Denmark, Israel, Australia, Finland, Sweden, Singapore, Norway, Canada and New Zealand.

Having analyzed the main trends in the development of pension systems over the past 20 years, experts from the Thinking Ahead Institute (TAI, Willis Towers Watson), an international research company, note in their reports that the growth rate of pension assets in defined contribution pension plans with established (fixed in size) contributions (as defined by Defined Contributions, DC) almost twice the growth rate of assets in pension plans with defined (fixed in size) payments (by type Defined Benefits, DB). At the end of 2020, pension plans with defined contributions accounted for 53% of the total assets of the Top 7 countries, according to the latest TAI report (Top 7 - Australia, Canada, Japan, Netherlands, Switzerland, UK, and USA). Thus, the authors call DC-type pension systems the number one design in the current millennium.

By the way, the defined contribution pension system of Kazakhstan is built according to the DC type, since mandatory pension contributions (MPC) are fixed at 10% of the employee's income. However, depositor’s pension payments are not fixed but depend on his individual pension savings, which are paid to him until exhaustion or inherited. As a result, no deferred obligations for pension payments are formed, and the pension system is self-financing and financially stable for citizens and the state (unlike any types of pay-as-you-go systems with social obligations for PAYG pension payments - from the state budget or insurance pension payments - from extrabudgetary funds).

- The pension system is a long-term type of social security, the success of which can be evaluated in 50-60 years. Besides, our pension reform has changed priorities several times in a short time. What long-term goals of the pension system is Kazakhstan pursuing? What reforms are expected?

- The long-term development areas of Kazakhstani pension system are kept and determined by the Concept for further modernization of the pension system of the Republic of Kazakhstan by 2030, approved by the Decree of the President of the Republic of Kazakhstan as of June 18, 2014.

The Concept aim is to modernize the pension system, which will ensure the adequacy of pension payments for a decent standard of living at retirement age.

The measures implemented within the framework of the Concept are designed to ensure the maintenance of the income replacement ratio with total pension payments at the level of at least 40% of lost earnings by 2030 with at least 35 years of experience in the pension system and the regularity of deductions 12 times a year (at the level of international standards).

The modernized pension system of Kazakhstan will remain multilevel, including state and funded components.

The concept provides for the diversification of sources of pension income of citizens with the distribution of responsibility for their pension provision between the state, employer and employee, as is customary in international practice. Taking this into account, it is planned to introduce compulsory employer pension contributions (OPVP) as of 2023, which will increase the employees’ pension savings and their future retirement income from funded pension.

Same as countries with developed pension systems, Kazakhstani government guarantees the citizens a minimum level of pension ensuring its gradual growth and approximation to international standards. The employees (from their own incomes and incomes of employers) form individual pension savings. However, the amount of savings of each employee depends on his personal labor contribution.

- What is a multi-component pension? Please share the details.

- When studying the experience of pension provision in different countries of the world over the past decades, the World Bank and OECD have come to the conclusion that multi-level (multi-component) pension systems are the most successful in solving the problem of adequate provision of income for citizens in old age. Multilevel systems are recognized as the most sustainable, balanced and efficient. They have a wider population coverage due to their orientation towards different layers of society (including the socially vulnerable), which contributes to poverty reduction providing citizens with a stable multi-component pension due to the diversification of sources, reducing the financial and budgetary, socio-economic and demographic risks of the country.

Besides, as noted earlier, against the background of global demographic trends (an increase in life expectancy, decrease in the ratio of the number of working-age citizens to the number of citizens of retirement age), the role of the funded system is growing worldwide. It allows keep an adequate social load on state budget and involve citizens in the formation of long-term pension savings. Therefore, a further development of the accumulative component of the multi-level pension system of Kazakhstan, as sustainable and socially fair, is strategically important.

The advantages of a multi-component pension are as follows:

  • It eases the load on state budget distributing the citizens’ sources of pension between the state, employer and employee;
  • It reduces the dependence of pensions on demographic trends;
  • It stimulates the participation of citizens in the pension system through individual registration of the length of participation, contributions and investments;
  • It invests pension assets in the country's economy.

- There used to be a popular discussion of the income replacement rate we were aiming for. Unfortunately, the current reforms do not touch on this topic. Or is this a misconception?

- Income replacement ratio (IRR) is a ratio of the retirement income to the employee's labor income before retirement.

According to OECD research, the appropriate rate of pension contributions to the DCPS depends on the target retirement income (expected retirement benefits) and the perceived risks associated with retirement saving investment. According to OECD calculations, in order to achieve the target replacement ratio (IRR) of 30% with a 95% probability, the minimum required pension contribution rate should be about 13%, with the regularity of contributions 12 times a year over a 40-year period.

The average pension contribution rate in OECD countries is about 18% and in countries with advanced pension systems included in the MCGPI pension index it is about 17%.

Based on many years of research and generalization of the experience of pension systems in different countries, the international organizations determine the standards for an adequate level of pension provision for citizens. The International Labor Organization (ILO) defines the target standard of Kazakhstan at the level not lower than 40%, the OECD - 70%, International Social Security Association (ISSA) - from 60% to 80%, MCGPI global pension index - from 45 to 60%.

Keeping income replacement ratio by total pension payments at the level of at least 40% of lost earnings is the Concept’s key task, taking into account the importance and relevance of this indicator. IRR is a generally accepted most important index of the pension system effectiveness. The Kazakhstani pension system’s reforms are aimed at the adequacy of pension payments to our citizens, growth of social and living standards of retirees corresponding to the target IRR by international organizations and countries with advanced pension systems.

- Mr. Kurmanov, you participated in the implementation of the pension reform in Kazakhstan, you have a colossal experience, impeccable reputation and positive public opinion. How important are these criteria and should they be taken into account when appointing the head of such an important financial institution as pension fund?

- The criteria you have mentioned are applied when appointing the head of any large financial institution working with the savings of the population all over the world. The experience of work and participation in the formation of defined contribution pension system is obviously of great help. The pension system as a “living” organism, is going through the stages of its development, and improving both locally and overseas. We see what opportunities and prospects are on the example of other countries, analyze their experience, carry out long-term complex actuarial calculations and make reasonable proposals and implement legislative changes in our work.

This is good news that Defined Contribution pension system solves important life tasks of citizens, invests in the country's economy, and contributes to ensuring the economic independence of Kazakhstan, the level of its development is highly appreciated by international experts.

For example, the latest report by the international organization The Allianz Group published in May 2020 presents a rating of the world's leading pension systems. The rating is compiled according to such criteria as economic and demographic factors, stability and adequacy of pension systems. In the Allianz pension rating, Kazakhstan ranks 20th among 70 countries, leaving behind a number of countries with developed economies. This confirms the right choice of the strategy, pension system and directions of its further development.

- From the moment people were allowed to use part of their pension for housing, medical treatment or transfer to management companies, there were no complaints about the UAPF work. All operations are promptly and smoothly carried out. What is your opinion on the withdrawal of the population's savings from the UAPF?

- Almost nine months passed since the legislative changes had come into effect that gave citizens the right to spend part of their pension savings on their living condition improvement or medical treatment not included in the guaranteed volume of free medical care and compulsory social health insurance, as well as transfer of funds under investment management by managing companies.

To date, the UAPF has processed about 486 thousand applications for transfer of pension savings for housing condition improvement and/or medical treatment. The total amount of one-time pension payments was over 1.8 trillion tenge.

You are right, the UAPF implemented important instructions by the Head of State All operations are carried out promptly, services are provided in a timely manner, there are no complaints from our depositors on the UAPF work. People are able to assess the importance of their retirement savings and realize they are in stock, invested and provide benefit.

As the Head of State noted: “Our goal is not to give away all the savings now and leave people without a decent pension in old age, we need to create an incentive to bring salaries in from the cold, so that people can require their employers to pay pension contributions”.   

With this in mind, it is important to explain to depositors that their pension contributions and return on investment are intended primarily to provide a funded pension in old age. It is possible to estimate the size of your future pension by using the UAPF service, the Forecasting Pension Calculator (on website enpf.kz or UAPF mobile application). It calculates all the components in the multilevel pension system: the size of the future basic pension and old-age pension (PAYG pension) – out of state budget, as well as defined contribution pension (from compulsory pension, compulsory professional pension and voluntary pension contributions) – out of UAPF.

The calculation of future payments by the UAPF in terms of expected return can be carried out in three scenarios (pessimistic, realistic and optimistic). All forecast results, however, are presented in real value terms (that is, already net of inflation as of corresponding forecast period). The calculations are based on the depositor's real savings (the data is uploaded into the calculator from the personal account) and allow plan your pension, including how much it decreases in case of one-time pension payment withdrawal.

The minimum sufficiency threshold that remains on the pension account after the one-time pension payment is calculated to provide the depositor with cumulative pension payments only in the amount of the minimum pension. The aggregate pension will consist of a funded pension from the UAPF and a minimum basic pension from the state budget (forming 54% of the subsistence minimum). Therefore, the use of pension savings for alternative purposes requires financial literacy from depositors, the need to assess their expected pension, and weigh the pros and cons. It is time everyone should plan their future retirement income and strive to form the necessary savings in order to receive a decent pension after reaching retirement age.

Photos are from open sources.

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