Proposals from a group of experts on the development of the pension system in Kazakhstan
International assessment
In 2023, Kazakhstan's pension system was included for the first time in the global pension index MCGPI 2023, ranking 20th among 47 countries. In general, the assessment for Kazakhstan was relatively high in two indicators - “Sustainability” (7th place) and “Integrity” (14th place) - due to the construction in our country of a comprehensive, financially sustainable, multi-level pension system, including state and funded pensions. All three parties participate in the pension provision of our citizens: the state, the employee and the employer. However, the third indicator – “Adequacy” – received a low score (38th place).
The “Adequacy” indicator is of utmost importance for citizens, since it evaluates the size and conditions of indexation of the state pension, the level of pension provision in general, the savings and debt of the population, and more.
The results of the study confirm that the issues of adequacy of pension payments in Kazakhstan (which are key in any pension system) are acute and require solutions in the interests of our citizens.
The compilers of the index - the international expert company Mercer and the CFA Institute - made the following basic recommendations for further improvement of the Kazakh pension system:
- increasing the minimum level of support for the poorest older people,
- incentives to increase the level of pension savings by households,
- reduction of early outflow of pension savings during the period of their accumulation and investment.
System problems.
Taking into account the international assessment, a group of Kazakh experts who stood at the origins of the formation of the financial market and funded pension system in the republic: Grigory Marchenko, Oraz Zhandosov, Bolat Zhamishev, Kadyrzhan Damitov, Anvar Saidenov, Yelena Bakhmutova, with the participation of Gulfairus Shaikakova and with information and analytical support from the Unified Pension Fund carried out an analysis of the state of the domestic pension system (current and future based on long-term actuarial calculations).
Based on the results of the analysis, a range of systemic problems requiring urgent decisions was identified.
1. State pension. The state pension consists of two parts - joint and basic pension. The size of the state solidary pension for retiring citizens is steadily declining (as they have less and less work experience before 1998). At the beginning of the 2040s, the assignment of joint pensions to citizens (reaching retirement age) will cease. At the same time, the current parameters for the growth of the state basic pension will not ensure an adequate standard of living for pensioners in the future. The basic pension depends on the subsistence minimum (LW), indexed only to forecast inflation, while the growth of labor income outpaces actual inflation. As a result, there is an objective decrease and depreciation in the amount of state pension payments to pensioners relative to the income of working citizens.
2. Notional funded pension. The introduction of employer compulsory pension contributions (ECPC) from the beginning of 2024 according to the notional funded model cannot compensate for the reduction in the PAYG pension. ECPC was introduced only for citizens born in 1975, and the first benefit payments will begin only in 2038. The size of future payments from ECPC savings will be very small (the median payment in 2040 could be 8-10 thousand tenge in 2024 prices). In addition, the notional funded model is financially unstable (there are risks of reducing benefits or attracting budget subsidies) and does not take into account the interests of the employee and employer in their payment, since it is redistributive and savings do not belong to the employee’s property.
3. Funded pension. The pension savings of many savers are relatively low, including those reaching retirement age (37% of those retiring in 2024 have less than 5 years of savings, instead of the 26 years possible since 1998). The main reasons are the insufficient level of income of workers and, often, understatement of declared income, incomplete and irregular payment of compulsory pension contributions (CPC), a shadow wage fund and informal employment. Statistics on payment of contributions confirm that the problem (low size and low regularity of payment of CPC) mainly (as in other countries) concerns self-employed (including informally employed) citizens
International and domestic experience shows that if there is an accessible and convenient mechanism for paying pension contributions (following the example of the CAP) and the use of incentives, it is possible to gradually bring some of the informally employed citizens out of the “shadow”. A number of countries (Germany, Spain, Malaysia, Turkey, Uruguay) use such programs. Kazakhstan also has positive experience of state support for savings (co-financing of housing savings, educational savings system, contributions to the pension account of mothers during their parental leave, etc.).
4. Investment management. There is practically no competitive market for managing pension assets. The NBRK became the main manager (the share of pension assets in the management of the NBRK as of January 01, 2024 was 99.8%) with a predominantly conservative investment of pension assets. In the interests of contributors, systemic measures are needed to actively develop competition and increase real (i.e., above-inflation) returns on pension assets
Suggestions.
To solve pressing problems, experts developed and submitted for consideration to the Head of State a package of systemic measures to increase the financial stability and adequacy of the pension system of Kazakhstan.
1. Adequacy of the state pension and stability of budget expenditures on pension benefit payments.
Considering that Kazakhstan is a socially oriented state, against the backdrop of a gradual decline in joint pensions, it is proposed to strengthen the state component of the multi-level pension system through strengthening the basic pension.
For these purposes it is proposed:
first, define the minimum wage (MW) as a single minimum standard for forecasting and calculating all payments in the pension system. This approach corresponds to the international practice of constructing a stable parameterization of pension benefit payments. This parameterization will determine the target pension standard (in relation to the minimum wage). In general, the dynamics of growth in labor income should be taken into account (for reference, on average for OECD countries: the minimum wage is about 50% of the median salary, the minimum guaranteed pension is about 60% of the minimum wage). A gradual transition to the use of the minimum wage will provide more adequate pensions compared to the current use of the subsistence minimum;
secondly, to stabilize and maintain state budget spending on state pension not lower than 3% of GDP (which corresponds to the level of 3-4% of GDP in such OECD countries as Australia, Mexico, Chile, etc., where there is also a funded pension system) by commensurately increasing the adequacy of the size of the basic pension. As a result, with the growth of the country’s economy and GDP, the level of state pensions (the welfare of all pensioners) will correspondingly increase and the level of state spending on pensions from the budget will be maintained.
2. Adequacy of pension savings and lifetime benefits from the funded pension system.
It is proposed to further develop the funded component of the multi-level pension system to ensure the adequacy of the growth of pension savings.
For these purposes it is proposed:
firstly, the ECPC (employer compulsory pension contributions) introduced from January 1, 2024 (the contribution rate increases gradually from 1.5% to 5% by 2028) should be transferred from the notional funded (actually redistributive) system and sent to:
- in the amount of 4% - to individual pension savings accounts (IPSA) of employees (similar to 10% compulsory pension contributions) to ensure the adequacy of their pension savings (according to OECD calculations, an adequate contribution rate for the formation of a funded pension should be at least 13%);
- in the amount of 1% - to the account of guaranteeing the lifetime of benefits from the funded pension system (if the recipient exhausts his pension savings).
secondly, to ensure equal access to pensions for all citizens through the ECPC, without limiting the year of birth in 1975 (avoiding unequal pension income in the future and arbitrage between generations);
thirdly, without introducing a ban on the early use of pension savings, change the conditions and procedure for withdrawals, ensuring that depositors have the adequacy of their savings and future payments. In international practice, early withdrawal of part of savings is permissible, as a rule, in the presence of a lifelong pension (with payment amounts not lower than a certain minimum standard).
3. Expanding coverage, encouraging completeness and regularity of payment of pension contributions.
It is proposed to increase the coverage of the funded pension system of all layers of the employed population, including self-employed and informally employed citizens.
For these purposes it is proposed:
firstly, to gradually introduce counter-state co-financing of CPC for individuals who do not have a permanent employer, but who have earned income and regularly (at least 12 times a year with an income of at least 1 minimum wage) independently make pension contributions. These contributions can also be made for the year at once. As international practice shows, this contributes to the gradual emergence of such workers “from the shadows,” the transparency of their income, and the growth of tax revenues. Participation in the pension system will also ensure that they develop a work history used to calculate the basic pension and pension savings for a funded pension. Co-financing costs will in the future be returned by an increase in tax revenues and investments of pension assets in the country’s economy.
secondly, in order to form adequate savings for old age, it should be ensured that CPC is paid on income of at least 1 minimum wage. Only such CPC can be considered full participation of contributors in the funded pension system (taking them into account when calculating length of service and co-financing).
4. Increasing the efficiency of investment management of pension assets.
A number of recommendations are proposed for the National Bank and investment portfolio managers (IPM) to increase real return, taking into account international practice:
- the ability to target long-term real returns (except for crisis periods) on external (currency) and internal (tenge) pension assets;
- gradual increase in the share of the foreign currency portfolio (taking into account international practice and the gradual growth of the volume of pension assets);
- less conservative investment management (in order to increase profitability):
- for external assets – inclusion of investments in growing assets;
- for domestic assets – a gradual reduction in the share of investments in government securities and securities of the quasi-public sector and an increase in investments in the economy through reliable corporate securities;
- introduction of multi-portfolio management with the right for investors to independently select one or more portfolios with different investment strategies from management companies (in order to develop a competitive management market and take into account the interests of investors);
- consideration by the National Fund Management Council (as part of the annual report of the UAPF) of the results of actuarial forecasting of the adequacy of the future pension (state and funded) of Kazakhstanis.
The proposals are aimed at strengthening all components of pension provision, are interconnected and must be taken into account as a whole.
The proposals made by the experts are being considered by the relevant government bodies, and were also presented for discussion at a meeting of the Public Council under the UAPF (June 14, 2024) and received support. Detailed materials and minutes of the meeting can be found on the UAPF website.
