 The pay-as-you-go pension system Kazakhstan inherited from the Soviet Union had an inefficient collection and payment system. After the country gained independence from the Soviet Union, economic dislocation together with rising budget deficits and mounting pension arrears led to growing social tension among the people.
The boiling point came in 1997. Pensioners had not received any money for almost a year, arrears exceeded 36 billion tenge, and the government had no means to pay them. Its efforts to provide essential goods and food instead of the pension didn’t help. Despairing pensioners organized mass protests across the country. Kazakh government launches radical reform measures  It was then that the government decided to radically reform the country's pension system. It embarked on an entirely new scheme whereby an individual could accumulate money for his or her future pension in a privately managed fund. The objective of this ambitious reform was to protect the incomes of pensioners while at the same time promoting the growth of the private sector and the development of the country's capital markets.
“We launched the reform with three goals in mind: first, to put hope in people’s hearts; second, to restructure the shaky system; and third, to attract funds and expertise from our donors,” says Alikhan Baymenov, Kazakhstan's former minister of labor and social protection.
The plan, designed and developed by the government, was supported by the World Bank. The Bank decided to finance the initial implementation of the scheme through a Pension Reform Structural Adjustment Loan of US$ 300 million. The Bank also provided technical assistance to the government to strengthen analysis and regulation and further develop the pension system's legal and institutional base. Paying pensions on time and ensuring transparency and credibility in the new system  Following the reform, every working individual started making contributions to a special account in a pension fund of his or her choice, while the government continued to pay pensions to those already retired with the help of the Bank’s loan. Private companies were established to manage the funds, investing them in the local securities market. This, in turn, provided the additional financing needed for the economy to grow.
To ensure the credibility of the new system, a state-owned pension fund was also established, and the accounts in this fund were backed by a government guarantee—which was extended to all pension funds after a few years.
Contributors were entitled to receive information on their accounts on a regular basis, as well as on demand. They also were allowed to switch from one fund to another, upon comparison of the funds' profitability, which was announced in a public report for each fund.
The World Bank’s financial support also allowed a minimum monthly pension to be established. This is regularly adjusted in line with inflation and budget incomes.
The pension system’s assets now exceed US$ 2.7 billion (about 7.5 percent of the country's gross domestic product) and continue to grow as greater numbers enter the work force. In addition, the new system has boosted domestic investment in the corporate sector, allowing not only the largest companies but also some medium-sized businesses to tap the market.
“Our system is still not perfect,” says Baymenov, “but the foundation is good, and that will allow us to build on it.”
* * * This progress was made possible thanks to the Pension Reform Adjustment Loan (1998-2001). To read more about this World Bank project, click here. |
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