The Funded Pension Scheme in Uzbekistan: An Analysis

Table 2 

Projected Pension Savings From the Uzbekistan Funded Pension System  

For an Average Wage Male Worker, 2008-2047 

Year 

Length of 

covered 

employment 

Real Annual 

Wage 

(base=2008) 

Contribution 

rate (as 

percent of 

payroll) 

Annual 

contri-

butions 

Real 

Accumulated 

Pension 

Savings 

(base=2008) 

Nest Egg 

Ratio 

2008 

1 

2,280 

1 

22.8 

22.8 

1.0% 

2009 

2 

2,326 

1 

23.3 

47.1 

2.0% 

2010 

3 

2,372 

1 

23.7 

72.9 

3.1% 

2011 

4 

2,420 

1 

24.2 

100.4 

4.1% 

2012 

5 

2,468 

1 

24.7 

129.6 

5.3% 

2013 

6 

2,517 

1 

25.2 

160.6 

6.4% 

2014 

7 

2,568 

1 

25.7 

193.5 

7.5% 

2015 

8 

2,619 

1 

26.2 

228.4 

8.7% 

2016 

9 

2,671 

1 

26.7 

265.4 

9.9% 

2017 

10 

2,725 

1 

27.2 

304.6 

11.2% 

 

 

 

 

 

 

 

2022 

15 

3,008 

1 

30.1 

537.5 

17.9% 

 

 

 

 

 

 

 

2027 

20 

3,322 

1 

33.2 

844.3 

25.4% 

 

 

 

 

 

 

 

2032 

25 

3,667 

1 

36.7 

1244.7 

33.9% 

 

 

 

 

 

 

 

2037 

30 

4,049 

1 

40.5 

1763.8 

43.6% 

 

 

 

 

 

 

 

2042 

35 

4,470 

1 

44.7 

2432.7 

54.4% 

 

 

 

 

 

 

 

2047 

40 

4,936 

1 

49.4 

3290.8 

66.7% 

Note: Other Assumptions: Real Income growth = 2 percent; Real investment returns = 4.5 percent. 

Source: Own calculations. 

 

The above simulations imply that the funded pension system will play a very small role in 

financing elderly retirements. 

In fact, Uzbekistan’s funded pension scheme has the smallest 

contribution rate among those currently in operation worldwide. For instance, in Chile, 

Colombia, Bolivia and El-Salvador, the contribution rate is set at 10 percent of payroll, 

while in Uruguay it is 12.27 percent, 12.07 percent in Mexico, 8 percent in Peru, and in 

Argentina it is 7.72 percent of payroll. Among Eastern European countries, the contribution 

rate in 7.2 percent in Poland, 6 percent in Hungary, and 5 percent in Croatia. In Kazakhstan, 

individuals contribute 15 percent of their income to their personal accounts. 

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14 

To further consider the expected returns on pension assets in Uzbekistan, the present law 

obliges the 

People’s Bank to pay interest on accumulated funds at a rate that exceeds the 

inflation rate. This requirement sends a positive message about the funded pension scheme, 

as it implies that pension savings are protected against inflation. However, in reality there is 

a big difference between the interest rate stipulated in the law and the actual level. The 

problem lies with how the government measures inflation. There are two main indicators of 

inflation, namely changes in the Consumer Price Index (CPI) and changes in the Gross 

Domestic Product (GDP) deflator. 

Normally, these two indicators nearly match in terms of magnitude. However, in 

Uzbekistan, the official CPI is normally much lower than the GDP deflator. For instance, in 

2007, the GDP deflator was 24.0 percent, while the CPI was only 6.8 percent. In 

Uzbekistan, the government reports the inflation rate based on the CPI. Since this CPI 

serves as the base for determining the interest rate paid on pensio

n savings, individuals’ 

pension savings will lose their real value over time to the extent that the CPI understates 

actual price changes. 

Another important issue associated with investment returns is the asset allocation of the 

pension fund portfolio. Curr

ently, the People’s Bank is allowed to invest pension funds 

only in domestic financial instruments such as government bonds, corporate bonds and 

deposits at commercial banks. Regarding the diversification of the investment portfolio of a 

funded pension scheme, Pfau (2007) 

argues for broader investment of Pakistan’s pension 

portfolio into equities and international assets with simulations showing how such 

diversification leads to improvement in the long-term sustainability of the pension scheme. 

Only allowing investment in domestic fixed income securities exposes pension fund assets 

to too many idiosyncratic risks and also leads Uzbekistan workers to endure a high 

correlation between the general health of their economy and their retirement savings.