Age of potential clients for concluding a retirement annuity agreement and amount of savings sufficient for such agreement conclusion were reduced.
As of mid-January 2021, Kazakhstanis who have reached the age of 45 have the opportunity to conclude a deferred retirement annuity agreement with life insurance companies. Retirement annuity is an agreement with insurance company that allows a citizen to start receiving pension earlier than the due date, provided that he has a sufficient amount of savings in the UAPF.
“The main condition is the availability of a sufficient amount of pension savings in the UAPF, which will ensure annuity payments in the amount of at least 70% of the subsistence minimum. People with mandatory professional pension contributions for 60 months in total have access to concluding a deferred retirement annuity agreement from the age of 40,” explained Gulmira Ubegaliyeva, the Board Chairman of JSC LIC Eurasia.
The amount of sufficiency for concluding a retirement annuity in 2021 has dropped due to the change in the size of the minimum monthly payment under retirement annuity agreements. The monthly payment used to be to be at least the size of the minimum pension. Now, the amount of sufficiency for men aged 45 is 6,172,907 tenge, for women - 7,725,673 tenge.
“There is a great positive sign of early women’s retirement. In this case, the joint annuity will combine the savings of both spouses and distribute their income evenly. Also, after one of the spouses passing, the second will continue to receive pension payments according to the agreement,” said Azamat Yerdessov, the Board Chairman of LIC Freedom Finance Life.
For the category of people who have reached 40 years of age, for whom the employer has paid mandatory professional pension contributions for at least 60 calendar months in total and who have a sufficient amount of savings in the UAPF, the amount of sufficiency for men is 6,973,861 tenge, for women - 8,632,647 tenge.
“The client actually documents the income received in the UAPF when concluding a retirement annuity agreement, and then after the start of the payment period, such payments will be indexed by 5% annually. Besides, after the retirement annuity agreement conclusion, the client can use the entire balance of savings in the UAPF to improve housing conditions, pay for medical treatment or transfer the funds to trust,” explained Zhanar Zhubaniyazova, the Chairman of the Board of JSC Halyk-Life.
The introduction of joint annuities is planned in the near future. A joint retirement annuity involves the participation of married couples or close relatives in the agreement. The product allows combine the savings of spouses/close relatives, if one spouse/close relative does not have enough pension savings to buy annuity from insurance company, and the second has a surplus.
How did these changes modernize the Kazakhstani pension system?
“People are given the opportunity to diversify their financial risks, since they have two sources of pension payments: the payments under the retirement annuity agreement, as well as pension payments from the UAPF, as after the retirement annuity agreement conclusion, the client continues to work and make contributions to the UAPF until reaching retirement age,” says Zhanar Zhubaniyazova.
The citizens are also given the opportunity to manage their own pension savings; in particular, through the choice of a management company, and by deciding which source they want to receive pension payments from, the UAPF or a life insurance company.
“This initiative is the next step to the financial market intensive development. Besides, in parallel with the pension assets market, the securities market is stepping up as well, - explained Kairat Chegebayev, the Board Chairman of JSC LIC Nomad Life. - In general, the changes in the pension system are significant: I can now assess the availability of a retirement annuity as a positive factor, however, the impact of using lump-sum pension payments for housing condition improvement or medical treatment on the system will be hard to evaluate.”
The criterion for sufficiency of funds for a lifetime pension should be a guarantee of ensuring lifetime payments, indexed by the size of inflation. A deferred retirement annuity is that guarantee. It means that a depositor will have the right to conclude a deferred retirement annuity agreement with a life insurance company at any age with sufficient pension savings, thereby gaining access to participation in investing savings.
“What would be the point of this for the pension system of Kazakhstan? It stimulates the creation of a competitive environment and entry into the domestic market for institutional investors represented by pension asset management and life insurance companies, and creates healthy competition for the investment activity efficiency,” Kairat Chegebayev emphasized.
These changes can also be characterized as a transition to the state guarantee international standards for pension savings safety.
What are the international standards?
“The upgrading of the pension system enable people to choose the most lucrative and convenient options for pension payment receiving. Besides, retirement annuities have long been the main instrument for ensuring stability in old age in many developed countries,” believes Azamat Yerdessov, the Board Chairman of LIC Freedom Finance Life.
In almost all countries where the level of pension payments does not differ much from wages, the pension system operates according to the following principle: firstly, the employer and employee make contributions from income, which form the basic pension in the future, and secondly, citizens enter into agreements with life insurance companies under the retirement annuity program.
With average monthly nominal salary (222,261 tenge), Kazakhstanis receive 2.15 times less upon retirement. A similar ratio of salaries and retirement benefits are in Russia, Italy, Finland and Canada. However, in some countries, the size of pensions is only 1.27 times lower than the monthly salary, as, for example, Denmark.
The US pension system is as follows: the average monthly salary for Americans is $4.15 thousand, which is 2.76 times more than pension payments ($1.5 thousand per month). The retirement age for men is 67 years and for women - 65. If desired to retire early, one pays a fine of 20% of pension payments and goes on a well-earned rest at 62. In comparison with this system, the Kazakhstani one looks more beneficial.
The Singaporean pension model has been frequently mentioned in the media lately. The changes occurred in the pension system of Kazakhstan, namely the possibility of using surplus savings for the purchase of real estate, medical treatment, or transfer to a management company, are somewhat similar to the Singaporean model of pension provision, but still have significant differences.
“Compared to other countries, people in Singapore are required to contribute to the pension system at a very high rate. But as a result, they are allowed to make large pre-retirement withdrawals (for buying a home, paying for medical services, investing, etс.), - says Gulmira Ubegaliyeva, the Board Chairman of JSC LIC Eurasia. - For example, pension contributions of Singapore residents go to the account of the Central Savings Fund, monthly contributions are made both at the expense of employee and employer, the total contributions make about 37% of wages, 17% are formed by the employer and 20% - by the employee. The rate size (for each of the three accounts) depends on the resident’s age, for example, the rate for residents over 65 is 11.5%. The proportion of distribution between accounts also changes: the older the resident, the more deductions go to the medical account, which is a complete analogue of our compulsory health insurance, it gets from 8 to 10.5% of the salary. “
The changes in the law on pension provision will allow Kazakhstanis to take care of their old age beforehand, without losing the quality of life after retirement. Besides, modernization of the domestic pension system continues, and we can hope that our pension system model will become a generally recognized benchmark worldwide.
Photos are from open sources.