Years 2007 — 2008 are marked with the 10^th anniversary of the accumulative pension system of Kazakhstan. The international conference “The Pension Market of Kazakhstan – 10 years of system reforms” arranged by the Accumulative Pension Fund “GNPF” was dedicated to this event and to the review of the first results.

PARTICIPANTS OF THE CONFERENCE

The conference held on September 25, 2007 in Almaty where the leading experts in the field from Kazakhstan and abroad got together became an outstanding event for the pension market of our country. The conference was participated by more than 150 representatives of various financial and state institutions, such as the RK National Bank, European Bank for Reconstruction and Development, accumulative pension funds, pension assets investment management organizations (PAIMO), State Pension Payment Centre, RK Ministry of Labor and Social Protection, RK Agency for Regulation and Supervision of the Financial Market and Financial Organizations, World Bank, and a number of other organizations.

OBJECTIVE

The following many-sided goal was set to the participants: discussion of the pension market development stages, review of the first 10-year period results, analysis of achievements and development of plans and recommendations aimed at the further development of the pension system.

PROGRAM

The aim stated was attained due to the infomativeness of the following reports included in the conference program:

— «Significance of Accumulative Pension Funds in the RK Financial System» / Anvar Saidenov, RK National Bank
— «Current State of the RK Pension System, Urgent Problems of the APFs’ Asset Management / Gani Uzbekov, RK AFN
— «Results of Pension Reforms in the RK» / Nurzhan Alimukhambetov, APF of the People’s Bank of the RK
— «Protection of Future Pensioners of Kazakhstan — required measures of the State and Market Participants» / Almas Kurmanov, RK Ministry of Labour and Social Security
— «Tendencies in the Development of the World Pension Market and Further Development of the Kazakh Model» / Jonathan Vullet, European Bank for Reconstruction and Development
— «Stages of the Russian Pension System Development» / Nataliya Grishkevich, Pension Fund of Russia
— «National Breakthrough Projects for Institutional Investors» / Kairat Kelimbetov, “Kazyna” Stable Development Fund
— «Optimization in the RK Accumulative Pension System» / Almas Kurmanov, RK Ministry of Labour and Social Security
— «Investment Issues of APFs, instruments for maintaining soundness and profitability of the funds» / Algazy Sekenov, «ГНПФ» Accumulative Pension Fund
The conference program containing “question-answer” sessions allowed discussing a number of other issues relating to the pension system functioning.

HISTORY OF THE ACCUMULATIVE PENSION SYSTEM IN KAZAKHSTAN

The stage of the pension system formation completed by Kazakhstan gives the right and the ground for crude summary, defining the prospects and further development of the Kazakhstan pension model.

At the end of the last century the issues of pension insurance became the subject matter of discussions and disputes in many countries, including Kazakhstan. These discussions and disputes were caused by a set of demographic, economic, and social factors. Some of them were connected with acceleration of the population ageing process resulted from the birth rate falling against the increase in the average duration of life. Another group of factors was caused by changes in the labor market situation, such as growth of unemployment, increase in the informal or partial employment and, as a result, the fact that part of the population was not covered by the pension insurance system. In its turn all this resulted in decrease in the number of employed population whose tax payments formed the financial basis of the solidary pension system practiced by many countries. Increasing number of pensioners and adverse changes in the employment structure cast some doubt on soundness of the solidary pension system, for it became clear that the working population was overloaded with pension taxes. Kazakhstan also faced some of these problems when it was about to become the first among other CIS countries to create its own accumulative pension system.

The modern Kazakhstan pension system started in 1997 when the Government of Kazakhstan approved the Concept for reforming the pension system. As a pattern the Chilean model was taken. The Chilean model has no distribution mean and is fully based upon the accrual of funds on personal accounts and capitalization of the contributions. Each employed joining the accumulative system is provided with a personal account where his/her pension contributions are accrued. This money is accumulated and invested by private pension funds, to be repaid to the saver upon his/her retirement. But it would be wrong to say that our accumulative system is the exact copy of the Chilean one, for the Kazakhstan model adapted the experience of other countries for using under the local conditions, that is why our model is unique by itself.

GNPF’s ROLE IN THE FORMATION OF THE NATIONAL PENSION SYSTEM

At the first stage the main role consisting in stimulating the development of the new accumulative pension scheme was played by the State Accumulative Pension Fund, an institution that was specially established by the Decree of the Government in September 1997. The State Accumulative Pension Fund became a kind of a launching pad for reforming the pension system in Kazakhstan: it became the first accumulative fund in Kazakhstan, received the first pension contribution and was the first to obtain the right for independent management of the pension assets. During ten years from 1998 till 2002, GNPF possessed the special “default fund” status, which allowed including in the number of its depositors those who had not made his (her) choice independently for any reason. In such a way they involved the maximum part of population in participation in the accumulative pension scheme, forming the depositors base of the accumulative pension system. But that same status had not allowed GNPF to operate as a valid and competitive participant of the pension market up to 2003 like other non-governmental accumulative pension funds.

Two years later in 2005 the Fund changed its official name JSC “State Accumulative Pension Fund” for JSC “«GNPF» Accumulative Pension Fund” where the abbreviation does not preserve its previous meaning. GNPF has fulfilled its historical mission on ensuring confidence of the population in the new pension system and laying down the foundations of the pension market and competitive environment.

Today GNPF is one of the largest pension funds of Kazakhstan taking the leading positions in the number of savers and total amounts of pension accruals and payments.

POSITIVE ASPECTS OF THE RK ACCUMULATIVE PENSION SYSTEM

The Kazakhstani experience of reforming the pension insurance system has been already acknowledged as one of the most successful in the world. The essence of the reform consists in the graduate transition from the solidary scheme to the accumulative one. This transition is implemented on the stage-by-stage basis, to be completed between years 2038—2040.

Currently our pension system consists of three levels or, in other words, pillars:

Pillar 1 — solidary system;
Pillar 2 — compulsory accumulative system;
Pillar 3 — accumulative system based upon voluntary contributions.

The functioning multilevel pension system is intended to cover the whole population of Kazakhstan. The population was segmented by categories defining the source of pension payments (state budget and/or pension accruals), basing upon age-related features of the Kazakhstan citizens involved in the pension system.
For example, the interests of generations whose employment had begun before starting the accumulative system are observed by the solidary system functioning in parallel with the accumulative one, with pensions being paid at the cost of social taxes and other payments to the budget (pillar 1).

Compulsory deduction of pension contributions during the period of employment meets the conditions of the second pillar of the pension system and makes younger generations bear independent responsibility for their incomes after their retirement, for their pensions will be paid to them from their savings to be accrued on their individual pension accounts.

Besides, Besides, each citizen may, by means of voluntary pension contributions, increase his/her accumulations and thereby ensure higher pension payments upon retirement (third pillar).

The ten-year development of the pension system may be summed up in sufficiently essential numeric terms: there are 14 accumulative pension funds actively operating at the pension market; 11 organizations carry out the management of pension assets; the said funds are served by 9 custodian banks; the total amount of pension accruals is about 1,1 trillion tenge, i.e. increased 40 times as much as the first year of the system functioning. The number of population involved in the system has doubled, amounting now to 9 million people of the economically active population. The net investment income distributed among personal pension accounts has amounted to almost 300 billion tenge.

Special attention should be paid to the current framework ensuring reliable preservation of pension accruals and proper operation of the system on the whole. For example the State undertook an obligation to guarantee the preservation of pension accruals in all pension funds, taking into account the inflation rate. This guarantee is based upon legally fixed requirements and restrictions intended for accumulative pension funds and pension asset investment management organizations: mandatory licensing; establishment of prudential standards and limits ensuring their financial soundness; restrictions on transactions with affiliated entities; separate accounting of the owned and pension assets; mandatory keeping pension assets with custodian banks only. It should be noted that no case of necessity to pay the state guarantee has been observed for the whole decade the new system is in operation.

Besides, pension funds have now become large institutional investors having a significant influence upon the development of the Kazakh economy.

ACTUAL PROBLEMS AND OUTLOOKS FOR FURTHER DEVELOPMENT

The conference program drew special attention to the defects that are currently peculiar to the Kazakh pension system. In the analysts’ opinion these are the insufficiency of pension accruals for adequate pension payments in the old age, insufficient involvement of the population in the pension system, regarding for the most part the rural and self-employed population and investment culture; a low level of financial literacy and investment culture; insufficient development of the voluntary pension system; problems of efficient investing under conditions of deficiency of attractive and, at same time, sound securities etc.

One of the means to solve the said problems may consist in the introduction of so-called “multiportfolios” which would allow each saver to independently make his/her own investment decisions in the sphere of management of and increasing his/her pension accruals on the basis of his/her own preferences in the proportion of risks and profitability. For the beginning it is planned to introduce only three such portfolios based upon conservative, moderate, and aggressive investment policies. But in the future, under certain conditions it may be possible to introduce another combination of a greater number of strategies. Therefore it becomes possible that savers will be vested with not only rights, but also with responsibility for the management of their pension assets. Analysts hope that such a measure is to be efficient in at least three problematic positions: improvement of the population’s financial and investment literacy and involvement of those who prefer to remain outside the pension system. By the way, the introduction of multiplicity of the investment portfolio along with firm guarantees of the safety of pension accruals are the objectives of top priority stated by the Head of our country within the further development of the accumulative pension system in Kazakhstan (http://www.kz-today.kz/index.php?lang=rus&act=arch&uin=1133168007&chapter=1153423881&n_date=2007—09-02).

Higher profitability exceeding the inflation rate and thereby ensuring something like an increase in pension accruals became one more theme for discussions at the conference. The following proposals were considered by the participants:

— enhancement of the local investment market and the range of the financial instruments offered;
— regular and stable issuance of the state securities;
— analysis if it is possible to use the pension assets in the implementation of the breakthrough projects by means of issuing bonds of the development institutions (“Kazyna” Fund for Stable Development, JSC Kazakhstan Holding for State Assets Management “Samruk” and so on).
— transition to the rating system in the selection of financial instruments and facilitating the penetration of financial instruments with high ratings to the local market.

SUMMING UP THE CONFERENCE

A great deal of things has been already done for further development of the Kazakhstan pension system in part and on the whole and there are sound reasons to believe that the Kazakhstan pension scheme has properly established itself. But we are not going to rest on our achievements, considering the complexity of tasks to be solved by the market participants, which will perfect the system thereby improving the living standards of the population.