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How the Funded Component of Pension Works? (Part 3)

The funded part of pension emerged eight years ago and is taken from 2 per cent of employee’s wage.


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Earlier we have discussed that pension consists of three parts: basic, first and second insurance portions. According to Social Fund, today the average pension is 5,682 soms. This amount is the sum of above-mentioned components of the pension system. For details see How Pension System Works in Kyrgyzstan 

However, few people know about the existence of another component in the pension system – a funded component. Contributions to this component are accumulated on a separate account of working citizens and as they reach their retirement age, this money will be given to them together with the investment income. In other words, these savings are collected and accumulated. Yet they are given only once, when a person goes on pension.

Let’s gain insight into how it works, who and how increases the savings and how to get the sum accumulated.

Don’t forget that the major objective of the state pension system is a financial security of incapacitated citizens in old age, in case of loss of breadwinner, disability. The funded component applies only to old-age pensioners since January 1, 2010.

“The funded component in the existing pension system has been designed to reduce dependence of the pension system on any possible demographic problems in the future and to improve the image of the pension system,” as the official website of the Social Fund said.

Since January 1, 2010, employees of enterprises, organisations and entities started to transfer not 8 per cent of their wages, as before, to the Social Fund, but 10 per cent, two of which are automatically transferred to the employee’s personal account with the State Pension Savings Fund (GNPF).

The Social Fund’s GNPF was specifically established to collect and accumulate two-per-cent contributions of employees. These funds are invested by the Fund in government securities issued by the Kyrgyz ministry of finance.

Another benefit of this component is that every person forms their own future pension. The contributions are not used to pay pensions to others (as eight per cent), but are transferred to the individual account. In this case, GNPF acts as a custodian and multiplier of funds.

According to the government decree “On rules of payment of pension savings by Social Fund of the Kyrgyz Republic from the State Pension Savings Fund”, the funded part of pension is awarded and paid out to those recipients that have pension savings on their personal insurance accounts. Citizens who have departed or are departing to another country for permanent residence have a right to obtain this money. A heir of a deceased employee may receive this money.

Since January 1, 2012, retired employees and male employees born before January 1, 1964, as well as females born before January 1, 1969, were exempted from paying insurance contributions to GNPF. In other words, this category of citizens doesn’t qualify for the withdrawal of the funded part of pension. The same applies to the citizens working under the patent (self-employed population).

Migrants may withdraw the funded part only if they have paid 2 per cent contributions to GNPF before their departure from the country.

How much Kyrgyzstanis have accumulated

“The total amount of the funded component is 16 billion soms as of today. 800 million soms were collected in 2010, over a billion in 2011, over 900 million in 2012. By results of 2017, the fund received 7 billion 700 million soms. The contributions from incomes amounted to 6 billion soms. As of January 1, 2018, the total amount of the funded component was 13 billion 788 million soms,” director of GNPF Rakhatbek Pirmatov explained.

Rakhatbek Pirmatov. Member of the Board of Social Fund of the Kyrgyz Republic. Director of State Pension Savings Fund at the Social Fund of the Kyrgyz Republic. Photo taken from the official website of the Social Fund of the Kyrgyz Republic.

“A rough calculation shows that the income from employee’s savings is about 80 per cent of the amount contributed. If, for example, an employee contributed 100 soms in 2010, today their personal account will contain 180 soms,” Pirmatov assured us.

The income on investment, according to him, is 12-13 per cent per annum.

From 2013, GNPF has started paying out the funded part of pension to pensioners, and today qualifying pensioners have received 547 million soms in total.

GNPF receives the investment income on savings from investing money in government securities. According to Pirmatov, earlier GNPF had invested in commercial banks, too, but due to “internal disagreements” cooperation with them was suspended.

Now the Fund draws up documents with new requirements to banks and upon completion it will resume cooperation with them.

A real-life example

Let’s try to calculate how much money can be accumulated on an employee’s individual account from the date of introduction of the funded component.

In our previous material, we said that if an employee receives 15 thousand soms after taxes, their contributions to Social Fund amount to 1,851 soms, i.e. 10 per cent of wage.

2 per cent of it, i.e. 370 soms, are contributed to the State Pension Savings Fund every month. There are 93 calendar days from January 1, 2010 to September 30, 2018. If we multiply this number by the total number of months, we’ll get 34,410 soms.

370*93 =34,410

According to GNPF, the investment income on savings is 80 per cent, i.e.:

34 410*80/100= 27 528

Let’s add savings to the income received:

34 410+27 528 =61 938

In other words, if a person goes on pension on October 1, 2018, GNPF will have to transfer to him/her the above sum.

Why personal account information is unavailable to citizens

Every employee can obtain a statement of total amount of all contributions paid during the period of validity of their savings account from the Social Fund. But they won’t find any information about the amount of the investment income in this statement.

However, in the future the website of Social Fund will have a personal profile option for employees, where they can obtain this information.  Bidding for 9 million soms was already held, but the project implementation period is unknown, the agency said.

Opportunities for employees

Starting this year, Kyrgyzstanis will be able to accumulate the funded part of their pensions in Non-governmental Pension Funds (NPF) and managing companies.

Back in 2015, the government issued a decree “On the exercise of insured person’s right to choose a pension savings fund or a managing company.” It took effect in 2016. But in fact it became possible only in 2018.

The delay was caused by some provisions that toughened requirements to non-governmental savings funds and managing companies. The requirements were toughened to strengthen and maintain financial stability on the market of companies that administer the funds of employees.

For example, the required authorised capital for a NPF was increased from 10 million to 40 million soms, for managing companies from 3 million to 10 million soms.

Director of GNPF Rakhatbek Pirmatov reported that in 2017 a tender for the receipt and administration of employees’ money was held among managing companies. As a result, one company won it, but refused to sign the contract, for unknown reasons.

The tender was not held among NPFs as they have strict requirements any way. Today Kyrgyzstan has only one non-governmental pension fund called “Kyrgyzstan”.

“We have managed to increase our authorised capital to 40 million soms by the end of 2017, and since 2018 we have fully prepared to receive citizens who wish to take their funded component from Social Fund,” director of NPF “Kyrgyzstan” Kadyrbek Nurmanbetov said.

Kadyrbek Nurmanbetov. Director of non-governmental pension fund “Kyrgyzstan”. Photo taken from personal archives of Nurmanbetov.

NPF cooperates with the managing company and central depositary to store and accumulate the contributions of employees, which reduces the risk of loss to zero. Moreover, the chances to accumulate pension contributions are good.

“A contract between NPF and an employee has a clause that binds us to invest the funds. Investment income will be not less than 10 per cent of the amount of contribution. According to the decree (“On the exercise of insured person’s right to choose a pension savings fund or a managing company” – editor’s note), Social Fund had to hold an outreach campaign among population regarding the exercise of people’s right to invest money in NPF and managing companies, but Social Fund is not interested in it. They benefit from silent employees,” Nurmanbetov said.

According to director of GNPF Rakhatbek Pirmatov, the full-scale awareness-raising campaign with field trips will be held after the winner of the tender among managing companies is decided. Today no managing company is involved in accumulating and investing the funded component.

An employee of one of Bishkek-based organisations, Aida, noted that she was the first to receive a statement from GNPF and applied for the withdrawal of money from a NPF account. To do that, one should apply to the personalised accounting unit of a district office of Social Fund.

Applications for the transfer of funds from GNPF to NPF are processed once a year, and the transfer itself is carried out from January to March.

Given the fact that a real opportunity to transfer money to NPF and managing companies has become available to Kyrgyzstanis only in 2018, and the transfer is possible only at the start of every year, there have not been any cases in Kyrgyzstan when a qualifying employee could withdraw the funds from GNPF account.

However, a qualifying employee may at any time decline the services of NPF and go back to GNPF.

Procedure of transfer of funds to NPF

The funded component is a mandatory part of the pension system, whereas the state duty is to protect employees. GNPF at the Social Fund is bound to maintain and accumulate the funds by the moment a qualifying employee becomes incapacitated.

The option to transfer money to managing companies and NPF has become available to let employees dispose of their assets independently.

However, every employee should be willing to transfer the funds, choose a managing company or NPF, enter into an agreement, and then apply to a district office of Social Fund indicating the name of a managing company or NPF chosen.

Asel Sooronbaeva – CABAR.asia School of analytic journalism alumnus  


This article was prepared as part of the Giving Voice, Driving Change – from the Borderland to the Steppes Project implemented with the financial support of the Foreign Ministry of Norway.

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