Pension reform concept approved in Kazakhstan

Kazakhstan has adopted a concept of modernization of its pension system until 2030, tengrinews reports citing the legal information system of Regulatory Legal Acts of Kazakhstan.

The reform envisages two core changes: getting rid of the equal basic pension and introducing notional pension accounts. The former will be replaced with basic pensions on the basis of seniority (the number of qualifying years), and the latter will be created from additional employer contributions in the amount of 5% of the employee's monthly wages.

Currently, pensions in Kazakhstan are made of three components:

- the basic pension that comes from the state budget. It is same for everyone and makes a little over 10,000 tenge ($54.5). Everyone gets the basic pension regardless of the number of qualifying years;

- the cumulative pension calculated based on the number of years the person worked before the pension savings system was introduced on January 1, 1998. It also comes from the state budget and there is a maximum and a minimum limits on the cumulative pension. This year's minimum is 20,782 tenge ($110) and the maximum is 54,171 tenge ($300);

- the accumulated pension that comes from the pension savings system introduced in 1998. It is made of monthly contributions in the amount of 10% of the person's monthly wages. 

With the pension system currently in place the average pension makes around 45,000 ($245). 

The Ministry of Labor and Social Protection is planning to abolish the equal basic pension and replace it with the basic pension calculated from the number of qualifying years. Thereby, the basic pension will not be the same for everyone. Whereas the other two components of the pension will remain unchanged for now.

The Minister of Labor and Social Protection of Kazakhstan Tamara Duisenova said: "By changing the basic pension this way we will solve the problem of three generations in one take – those who had had a low income before 1998, those who had worked a small number of qualifying years before 1998, and those who had not worked before 1998 and have only participated in the system of pension contributions.”

The new method will increase the average pension by 10 to 20 thousand tenge ($50-100), the ministry promised. But this is true only for those who have held official jobs for a fair number of years. Whereas those who have none or few qualifying years are not going to get any increase from the reform.

The new method directly links the basic pension to the number of qualifying years that a person worked both before and after 1998:

- those with zero to 19 qualifying years will receive a social pension equal to 50% of the subsistence minimum. This year's subsistence minimum is set to 19,966 tenge per month ($110) in Kazakhstan, so 50% makes $54. 

- those with 20 to 34 qualifying years will have 70 percent of the subsistence minimum (around $76 at the current subsistence minimum).

- those with 35 or more qualifying years will get the basic pension equal to the subsistence level - $110. 

The new method will come into effect on July 1, 2017. "The basic pensions will be recalculated for more than 2 million pensioners," Minister of Labour and Social Protection of Population Tamara Duisenova said, ”we are changing the principle: the basic pension will be paid based on the number of qualifying years. From then on, the individuals who have 10 qualifying years will receive 50 percent of the subsistence minimum. Those with 20 years will receive 70 percent of the subsistence minimum and those with 35 years or more will receive 100 percent of the subsistence minimum as their basic pension." The basic pension will then be summed up with the other two components that make up the monthly pension. 

Introduction of notional pension accounts is another proposed novelty. Each participant of the system will have an individual retirement account (in addition to the existing accumulative account) for the employer to make additional contributions in the amount of 5% of the employee's monthly salary. These contributions will not be compounded or become that particular individual’s money. Instead, they will be used by the Government to pay pensions to the existing pension receivers. Besides, these payments would later provide a pension bonus to those who will have at least 5 years of notional pension account contributions. 

"Before that employers have not really been involved in the pension system: the state pays the basic pension, and the 10% contributions are deduced from the people's wages. But now, these 5% contributions will be paid by the employer to the individual notional pension accounts," Duisenova said.

"The new contributions from employers will start from January 1, 2018. The system is called Notional Defined Contribution Pension System. It will support both the cumulative and the solidarity principles. The accumulation principle will be represented by everyone getting a second account for additional regular contributions to be transferred to. The solidarity principle is reflected in the subsequent pension bonus being a lifelong one, unlike the funds that come from the cumulative system, where the pension is allocated until the funds are fully exhausted," Duisenova said at the briefing on July 15, 2014.

As is stated in the document, the purpose of the new concept of modernization of the pension system is to ensure that pension payments are sufficient for decent standards of living in retirement.

However, not everyone agrees that the new development will have no side effects. In his interview with Tengri FM radio senior analyst of the Agency for ROI Analysis Yerlen Badykhan said that introduction of the notional pension accounts in Kazakhstan may boost the shadow economy.

"To meet the new requirements employers will have to either proportionately cut the incomes of their workers, so as to avoid cost overruns or start practicing so-called "gray wages”, Badykhan said. Grey wages is a term used for the wages paid in full or in part in an envelope, meaning that the officially declared wages are lower than the actual ones, and less taxes are paid.

In line with the expert’s reasoning, both the employers and the employees will be unhappy with the new development. “Kazakhstanis do not trust the pension system in general; they need the money not sometime in the future but here and now. Besides, these 5% used to pay pensions to some complete strangers may be interpreted as an additional social burden,” Badykhan explained.

In order to limit the negative perception of the initiative, Badykhan proposed to reduce some other social payments and accruals. Since companies will simply lack enough money to pay all of the contributions, “other types of social payments should be reduced” for them be able to pay the new pension contributions, he said.

The new concept of modernizing the pension system is still just that – a concept. A lot of work needs to be done to develop it into the actual legislative proposal and, later, the law on modernization of the pension system in Kazakhstan. Consideration the possibility of various interruptions of qualifying years accumulation, such as whether maternity leaves would count, and the drawbacks like escalation of the shadow economy it is especially important to make sure that the new system is effective.

The legal framework will be established during the first phase of implementation of the concept in 2016-2020. The top priority reforms like those mentioned above will also come into effect during the first phase. The second phase of 2020-2030 will see more measures to improve efficiency of the pension system and enforcement mechanisms to protect the rights of both contributors and beneficiaries of the pension system.