New Obligations for Employers: Mandatory Pension Contributions

July 1, 2023 came into forceSocial Code of the Republic of Kazakhstandated April 20, 2023 No. 224-VII ZRK. This code covers issues of social support from birth to adulthood, employment, labor safety, social insurance, assistance in difficult life situations, etc.

In order to improve the well-being of citizens and prevent social risks in the field of labor, the Social Code introduced mandatory pension contributions by employers (OPVR). OPVR is money transferred by agents (employers) from their own funds to a conditional pension account. An agent is an individual or legal entity, including a foreign legal entity, operating in the Republic of Kazakhstan through a permanent establishment, branches, representative offices of foreign legal entities, calculating and transferring the employer's mandatory pension contributions to the unified accumulative pension fund.

GPVR are established based on the employee’s monthly income, accepted for calculating the employer’s mandatory pension contributions:

• from January 1, 2024 – in the amount of 1.5 percent;
• from January 1, 2025 – in the amount of 2.5 percent;
• from January 1, 2026 – in the amount of 3.5 percent;
• from January 1, 2027 – in the amount of 4.5 percent;
• from January 1, 2028 - in the amount of 5 percent.

The increase in contributions will be made in stages, which will reduce the burden for employers. At the same time, the employee’s monthly taxable income must be at least 1 minimum wage and must not exceed 50 times the minimum wage established for the corresponding financial year. For 2024, these thresholds will be 85,000 tenge and 4,250,000 tenge, respectively.

Although payment of OPVR is mandatory for all employers, the law provides for exceptional cases. Thus, an agent is exempt from paying OPVR to the unified accumulative pension fund for:

• persons who have reached retirement age;
• persons with disabilities of the first and second groups, if the disability is established indefinitely;
• military personnel (except for conscripts), employees of special state and law enforcement agencies, the state courier service, as well as persons whose rights to have special ranks, class ranks and wear uniforms have been abolished since January 1, 2012;
• recipients of pension payments for long service;
• judges of the Constitutional Court of the Republic of Kazakhstan, whose powers have been terminated due to the expiration of the term of office established by the Constitution of the Republic of Kazakhstan, receiving a monthly salary for life, retired judges, receiving a monthly salary;
• persons born before January 1, 1975.

That is, the requirements of the legislation of the Republic of Kazakhstan for the payment of GPVR are mandatory for persons born after January 1, 1975.

The transfer of OPVR is carried out by employers through banks to the State Corporation for subsequent transfer to conditional pension accounts in the UAPF. Employers need to make the transfer by payment order with a list of individuals attached. Required information for each individual: IIN, last name, first name, patronymic (if any), date of birth, contribution amount and period (month, year) for which the employer's mandatory pension contributions are transferred.

The legislation provides for liability for late payment of OPVR. In case of failure to repay the debt under the OPVR, the state revenue authority suspends expenditure transactions on bank accounts and the agent’s cash desk. Also, OPVR amounts untimely transferred by the agent are collected by state revenue authorities or are subject to transfer by the agent in favor of employees with an accrued penalty in the amount of 1.25 times the base rate of the National Bank of the Republic of Kazakhstan for each day of delay.

GPVR were introduced in order to increase the level of pension provision in the Republic of Kazakhstan, taking into account the principles of division of responsibility between the state, employee and employer. However, despite the innovation, attention should be paid to the lack of state guarantees for the safety of pension savings.  Pension contributions within the framework of the conditional funded pension system will be made at the expense of the employer, while they will not be subject to the ownership rights of employees, as well as the right of their inheritance. That is, the funds accounted for in the conditional pension accounts of the deceased, who left for permanent residence outside the Republic of Kazakhstan and/or persons who have pension savings in excess of the amount of sufficiency for lifetime payments at the level of twice the subsistence minimum, will be redistributed among the remaining participants in the conditional funded pension system.

It turns out that the conditional pension savings of participants will include not only pension contributions made by the employer in favor of a specific employee, but also amounts redistributed from the conditional pension accounts of other participants who left the system early, as well as from the accounts of participants with sufficient savings.

We assume that the conditional savings system introduced by the legislator, although aimed at increasing the level of well-being, is nevertheless capable of causing a number of controversial discussions. This can be explained by the fact that the money contributed by the employer for a specific employee is not the property of either the employee or the employer himself. In fact, these funds can be endlessly redistributed among the remaining participants of a particular organization. It is not yet clear how exactly from a practical point of view the safety of funds will be guaranteed, but it is clear that employers receive an additional social burden.

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Authors:

Zaira Sarsenova, Partner, GRATA International

Zhansaya Izimova, Lawyer at GRATA International