This is not about early retirement, as sellers sometimes position this product, but only about the possibility of early savings use.
Retirement annuities are the common practice worldwide, and in Kazakhstan they were introduced as an additional option to pension fund payments. Retirement annuities smooth out the risk of increased life expectancy and protect the investor from surviving their savings.
The main advantage of annuities is payments made for life. Unlike classical pension fund payments that end when the savings are exhausted, annuity payments are made for life. The liability of life insurance companies is specified in the contract, and financial obligations towards the annuity are additionally protected by the insurance payment guarantee system. The retirement annuity implements the main condition of a funded pension system, conversion of savings into a lifelong source of payments.
The nature of the product lies in the insurance pool formation, in which the risks of surviving the savings of some annuities are offset by the risks of premature death of others.
But with all the advantages of pension insurance, it is very poorly developed in Kazakhstan. There is a number of formal reasons for this that affect the dynamics of the market at certain points, the introduction of moratorium on conclusion of pension annuity agreements in 2013 at the time of the pension funds merger, introduction of mandatory indexation of pension payments in 2013, and possibility of using professional pension savings for an annuity agreement in 2019, etc. There are currently about 60 thousand concluded contracts worth less than 300 billion tenge in the pension insurance system. Compared with the accumulative pension system, the annuity pension market is depressing.
The reason for incoherent development of retirement annuities lies in the lack of modeling and forecasting of all pension system parameters.
The annuity cost is determined by a number of such constant indicators, not changing from year to year, as age, gender, discount rate and indexation of payments, insurer's expenses, age and gender mortality rates and a dynamic minimum pension indicator (payment under a retirement annuity agreement cannot be lower than the minimum pension for the corresponding financial year).
The size of the minimum pension though is not an economic index; it is annually set by the Government of the Republic of Kazakhstan and depends on both the political situation and the state budget.
With a negative return on pension assets, the retirement annuity value is growing faster than the assets themselves. The obligations taken by the state to increase the minimum pension have led to the fact that the cost of a retirement annuity is tens of times more than the ability of a funded pension system to provide an adequate increase in savings.
This observation is questioning the bright future of pension insurance, because contrary to expectations, the number of investors able to buy this modern and profitable product will be annually decreasing.
The structures and life insurance companies involved need to seriously address the issue of methodology for retirement annuity development since it is obvious that it will very quickly become the rudiment of the pension system without intervention.
Either the rejection of minimum pension as a tool for calculating sufficiency in favor of a more static economic indicator, the growth of which can be used as a protection against inflation, or in general, the refusal to be tied to a macroeconomic indicator can become a rational solution.
The refuse to determine the minimum amount of annuity payment seems acceptable both from the point of view of satisfying the company's request for more flexible access to savings, and building flexible and profitable pension plans.
Formation of pension plans should be an important transition to increasing the investors’ responsibility for their future and satisfying their needs for regulated exemptions; it is about creating annuities with various payment options: deferred, with increasing or decreasing payments.
More flexible schemes meet the requirements of depositors more efficiently ensuring the annual growth of payments under the pension plan at a level not lower than inflation and formation of a stable share in the total replacement rate.
Photos are from open sources.