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Why Kazakhstani pension system needs reform

A person begins to seriously think about retirement in his 40s. The experts came to this conclusion in The Economic Times article. According to the author of the material “Will you have enough money when you retire? Your 40s is the time to ask this question”, the contracts are most often concluded or renegotiated with insurance companies, pension funds at this age in order to ensure a guaranteed income for life.
Why Kazakhstani pension system needs reform

The life insurance industry in Kazakhstan is limited by pension legislation and does not participate in the pension system during the accumulation period, appearing only during the payment period through the pension annuity instrument. The insurers cannot offer their customers practical services that are provided abroad for this reason. Understanding the situation well, life insurance companies, with the support of the Financial Institutions’ Association of Kazakhstan, turned to the National Bank. The topic is the transfer of a part of pension savings to the competitive environment. Until recently, the regulator has considered the concept of reforming the pension system, when, with sufficient savings (8-10 million tenge, which in the form of guarantees remain in the UAPF), part of the funds is transferred to the asset management company. The approach has several disadvantages though. For example, by age 55, a person may simply not have enough money to buy a life-long pension annuity with annual indexation of payments.

Deferred Retirement Annuity

Insurers offer to give Kazakhstanis the right at any age with a sufficient amount to choose whether to purchase a life-long pension payment instrument with indexation (deferred retirement annuity) or to keep money in UAPF. “Only life insurance companies carry out actuarial calculations and can say how much money a person needs to save for decent provision in old age. Deferred annuity is annuity acquired by a single payment or periodic installments, with payments after a certain period. Until this time, the insurance company invests and accumulates interest from these investments,” explained Galina Usacheva, the Managing Director of JSC LIC Nomad Life.

The option of a deferred retirement annuity will allow Kazakhstanis to make a choice between an insurance company and UAPF, and will also serve as a kind of criterion for the adequacy of savings for a life pension. According to experts, each person will be able to know for sure whether he has collected a certain minimum and what funds he will live on. “People will be able to make a choice, which is good, as they will take responsibility. Now, the state guarantees retirement income higher than inflation. This option will remain only for UAPF clients, and not LIC customers. We don’t know what expenses the state will have bear to guarantee income not lower than inflation, but the amount of pension savings is increasing, so the risks, not to mention the years with work of private pension funds and high inflation,” the expert reminded.

The deferred insurance annuity can be an attractive form of investment in Kazakhstan, as high requirements of the state to the reserves of the insurer and their investments make such an investment as safe as possible and at the same time quite liquid.

As a result, Kazakhstan will receive a relatively ideal intersection of responsibility: LICs as market players analyze, invest and work with clients, the state regulates and controls the industry.

Pension plan

As planned by insurers, people with high income that are able to save excess of the amount sufficient for a protected old age will have the opportunity to invest in either a PAMC or use unit-linked. “If you have 10 million tenge in your account: you conclude a deferred annuity agreement on 8 million, and you invest two in PAMCs, mutual investment funds, or create your own pension plan with KIC,” emphasizes Galina Usacheva.

It is assumed that individual pension plans will be based on unit-linked. This tool is still poorly known in Kazakhstan, but for many decades has been demonstrating excellent performance in the West. Unit-linked is a hybrid of classic accumulative life insurance with an investment component in the form of shares in financial instruments, that is, part of the portfolio at the request of the client is placed in more risky and potentially profitable financial instruments (for example, stocks, mutual funds, ETFs, etc.), the composition of which in the program can be changed periodically.

“Please note that if a person begins to receive payments on a deferred pension annuity, then no matter how long he survives into, the insurer will be obliged to provide him. The pension plan is concluded for the agreed period and enables the client to independently risk the excess of funds and earn on investment income,” the speaker says.

Besides, insurers propose that Kazakhstanis be allowed to change financial institutions once every 2 years. A tough competitive environment will improve the quality of financial instruments and give people a choice between different PAMCs and LICs.

Pension system

The experts at Mercer, an international consulting company, and Monash University Melbourne Center for Financial Studies, have presented the 11th edition of the Melbourne Mercer Global Pension Index (MMGPI). The document’s authors studied and ranked pension systems in 37 different countries. Kazakhstan is not on the MMGPI rating.

The main objective of the study is to evaluate each pension system by more than 40 indicators. Among them: integrity, sustainability, accessibility, transparency, reliability, population coverage, adequacy of savings, and stability. As a result, the scientists ranked the world's pension systems into 4 main groups, from A (high-class and reliable, brings good benefits, stable, high level of integrity) to D (the system has serious shortcomings to be removed).

The first group included only the Netherlands and Denmark that received 81 and 80.3 points, respectively. Australia is in the third place (in group B+). The Chilean system scored 68.7 points and was placed by scientists in the classical group B. “The system has a clear structure, many positive functions, but also has the potential for improvement, primarily due to increased life expectancy,” according to the MMGPI report.

The Kazakhstani pension system has been created using the example of Chilean system, but if evolution can be observed there as a result of negative moments, then in our country, unfortunately, the state reacted to the miscalculations of pension funds several years ago with regression, merging funds and removing the competition system. From this we can conclude that the domestic pension system after the reform could be referred to the systems in group B together with the Chilean pension system. Insurers proceed from this when substantiating the need for full participation of the most stable industry in the pension system.

International experience

One of the best pension systems in the world, the pension system of Netherlands is significantly different from other countries in continental Europe; it consists of compulsory private contributions and voluntary savings. Besides, the insurance companies play an active role in pension plans. People transfer contributions to an independent legal entity, as in insurance organizations or pension funds. Pension funds have the right to diversify risks by pooling accumulations of people of different ages (intergeneration risk sharing), while insurance companies are not entitled to do this, and develop a deferred pension annuity for each person separately.

Stock market

The active work of insurance companies with the population will make them large institutional investors that are able to change the situation on the country's stock market. The insurers form their investment portfolio from government and quasi-government securities, as well as shares and bonds of highly rated private companies.

It has been said for several years on the domestic trading platform that the insurance sector may become the trigger for the new development of KASE. “Life insurance companies are a naturally undervalued business in the financial sector that can grow and encourage the market,” said Andrei Tsalyuk, the Deputy Chairman of the Kazakhstan Stock Exchange, in his interview with “I think they will grow faster than all other market participants, so we have high expectations for them.”


Based on all of the above, it turns out that domestic insurers offer the National Bank not just an expansion of the range of services to customers, but a significant improvement in the performance of the entire pension system of the country. As a result, people, state, stock market and entire financial market of the Republic of Kazakhstan will benefit.

The pension system of Kazakhstan is now under the scrutiny of society and various forms of pressure. Thus, the aging of population will be recorded in the country over time; the long-term investments in states are already creating some problems where the rate of economic growth is reduced. The insurance companies are ready to work with people and have extensive experience for that and strict regulation on the part of the National Bank.


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