The pension reform is facing the following tasks for today: improvement of investment efficiency, savings security and stock market development, since pension funds have been the main driver for the development of the stock market. The basic version is to distribute a part of the pension assets to private management companies. The question is how to do it. The National Bank wants to see as asset management companies (PAMC) new organizations that have received specialized licenses for an exclusive activity category.
The market resists the idea because of high maintenance costs of “branches”. Besides, PAMCs (private management companies) will enter the pension market. The owners of large accounts (over 10 million tenge) will conclude an agreement on investment portfolio management with PAMC, transfer their “over” savings to the management company, relying on riskier investments and sharing investment risks with the manager. And finally, part of the pension money is offered to give under the management of life insurance companies. This is the only pension asset management model that has been developed outside the framework of the SAPF and operates on the local market. The program is used by people who have accumulated substantial money (about 10 million tenge) and have reached the age of 50.5 years (for women) and 55 years (for men).
Under the conditions of raising the retirement age in Kazakhstan (63 years for men and 58.5 years for women with a further increase up to 63 years by 2027), a pension annuity makes it possible to retire earlier and receive pension payments on a monthly basis for life. However, not everyone can use the retirement annuities. As of 2017, the annuity has risen in price significantly. Instead of 3 million tenge for men and 4-5 million for women, now it is necessary to pay over 7 million tenge for men and over 10 million for women.
The demand for retirement annuity has declined significantly due to rising costs, but interest in life insurance remains at an acceptable level. Aggregated data on the insurance sector show that life insurance premiums have grown since the beginning of this year relative to the same period in 2017 by 49%. In the context of asset management, it is important to note that life insurance companies are not at all favorites of the retirement race, although they have everything necessary for investment activity expansion. Since the beginning of the year, life insurance companies (there are seven of them on the market now) have been actively developing products that allow customers to combine investment management with life insurance, the so-called unit-linked programs, and participate in the insurer's profits.
Under the unit-linked program, the insurance premium paid by a client of an insurance company consists of two parts. The first part is used to form a fund that is directly related to the insured risk, the second part is the investment component, which is funded in securities. In the unit-linked programs compared to all other insurance schemes, the client chooses the directions for investing his money through mutual funds offered by life insurance companies.
The current state of the stock market will greatly improve with this product development, as insurance companies are interested in the emergence of long-term instruments with a predictable risk level. It is important to expand the participation of life insurance companies in the modernization of pension asset management, for example, by giving the opportunity to conclude a retirement annuity contract before reaching the age of 50 and 55 years, that is, to buy a deferred pension annuity. It will ensure the adequacy of pension savings and the diversification of the sources of the depositor’s future retirement income.
Another option is to use private retirement plans that combine the conditions of life insurance and investment management of the investor’s assets. Insurance products will help diversify the risks of managing pension assets, as well as increase financial literacy and the responsibility of the population for their own future: citizens will be able to determine the sources, size and form of future retirement income.
Author: Tatyana Batishcheva
Photos from open sources