Private pension funds in Azerbaijan: Risks and prospects Caliber.Az on investments for retirement

In many developed countries, private pension funds—whether trust-based or otherwise—have long played a key role in securing financial stability for retirees. These funds serve as a valuable supplement to state pension systems, enabling individuals not only to preserve their savings but also to grow them over time.

Azerbaijan is now taking steps in this direction. At a recent international conference in Baku titled "Adapting Social Protection Systems in the Context of Contemporary Challenges," experts assessed the outcomes of five major social reforms implemented in the country in recent years. These reforms have led to notable increases in the minimum wage, social benefits, and pensions. As part of this broader transformation, Azerbaijan is currently drafting legislation to establish a private pension system—an important step toward expanding financial security and retirement planning options for its citizens.

“Over the past few years, five large-scale social reforms have been implemented in Azerbaijan, leading to an increase in the minimum wage, social benefits, and pensions. The minimum wage has increased by 3.1 times, the minimum pension by 2.9 times, the average monthly pension by 2.6 times, and the average monthly salary has doubled. Special attention is also given to the social protection of the families of martyrs and war veterans. A new reform package, the implementation of which began this year, covers 3 million people,” said Azerbaijan’s Minister of Labour and Social Protection of the Population, Anar Aliyev, during the international forum “Adapting Social Protection Systems in the Context of Contemporary Challenges,” held in Baku at the initiative of the International Association of Pension and Social Funds (IAPSF) with the support of the State Social Protection Fund of Azerbaijan.

State support for vulnerable segments of the population is a cornerstone of the political course pursued by President of Azerbaijan Ilham Aliyev. Overall, consistent measures aimed at improving the social well-being of the population have become one of the key pillars of the country’s budgetary policy. It is worth noting that between 2019 and 2021, approximately 900 legal and regulatory acts were adopted in Azerbaijan to improve the social welfare of four million citizens, with an additional 6 billion manats ($3.5 billion) allocated for these reforms. Since 2018, benefits and pensions have increased fivefold, and over the past six years, an additional 8.5 billion manats ($5 billion) have been allocated for social support packages. Furthermore, an additional 1.4 billion manats ($823 million) has been earmarked in the 2025 budget to finance social payments.

“In the future, Azerbaijan plans to improve its pension system and strengthen its sustainability. We are committed to ensuring the well-being of our citizens, and since the establishment of the Association, certain steps have been taken in this area,” said Chairman of the International Association of Pension and Social Funds (IAPSF) Zaka Mirzayev during the conference.

It is quite evident that in the foreseeable future, Azerbaijan’s course of social transformation will remain focused on enhancing social protection and improving the population’s well-being, primarily by reinforcing the sustainability of state pension institutions. In particular, this refers to the familiar system of mandatory social insurance, which involves monthly contributions to the State Social Protection Fund (SSPF).

At the same time, as international experience shows, private pension funds serve as an effective complement to the state social protection system. Common in the United States, the United Kingdom, the European Union, and other developed regions, these structures function as alternative systems for accumulating and growing pension savings.

Trust-based pension funds, in particular, are legal entities that pool funds intended for future pension payments and invest them in securities and other assets. Such a pension trust fund may be established by a company, with its employees as the beneficiaries. In many countries, legislation in this area is designed to protect the interests of contributors: in the event of the founder’s bankruptcy, the assets of the trust fund cannot be seized. Similar funds can also be established by banks and insurance companies, allowing individuals to accumulate savings at their own discretion, which will be paid out upon retirement.

Importantly, private pension funds help diversify financial flows, becoming a source of low-interest, long-term credit lines. At the same time, by serving a social protection function, they reduce the burden on the state budget.

To recall, the “Financial Sector Development Strategy of Azerbaijan for 2024–2026,” adopted over a year ago by the Central Bank of Azerbaijan (CBA), is aimed at expanding financial accessibility, increasing the reach of sectoral services, and diversifying financial instruments. Notably, the strategy also envisions supporting the establishment of private pension funds in the country.

In this context, the “Socio-Economic Development Strategy of Azerbaijan for 2022–2026” should also be mentioned, which includes the objective of “Improving the pension system to strengthen the social protection of pensioners.” Responsibility for implementing this provision has been assigned to the Ministry of Labour and Social Protection of the Population, with the support of the Ministries of Finance, Economy, Justice, and the CBA.

Chairman of the Central Bank, Taleh Kazimov, believes that the government and the regulator share a unified vision regarding the development of private pension funds: “We are working on the most optimal model for our country, and this effort needs to be accelerated.”

According to Shahin Mahmudzade, Executive Director of the Central Bank of Azerbaijan, advanced international experience has now been studied — including the practices of Romania, Poland, France, Croatia, Türkiye, and several other countries — forming the basis for preliminary draft legislation on the operation of pension funds.

To build an effective non-state pension system in the country, inter-agency discussions are underway involving the CBA, representatives of state institutions, and the Azerbaijan Insurers Association. Work is ongoing to improve a number of issues arising from the national strategy, including the preliminary drafts of legislation.

“Overall, the creation of private pension funds will help establish conditions for the emergence of new financial institutions, long-term financial instruments, and deeper capital markets. It will also have a positive impact on strengthening the population’s security within the framework of social insurance relations,” the CBA Executive Director stated.

The Central Bank highlights the important role of life insurance companies in studying international experience and developing proposals to create effective management mechanisms for private pension funds. A key priority is to ensure transparency and financial stability in the operation of pension funds and to maintain their financial soundness.

This includes the need to improve the legislative framework to reduce risks and protect investments — the funds citizens allocate to pension funds. Equally important is the task of educating and raising public awareness: informational campaigns are planned to increase interest in private pension funds and promote the benefits of alternative pension savings.

On the other hand, when drafting the relevant legislation, special attention must be paid to the fact that private pension funds, like any investment instruments, are subject to various risks. The most significant of these are related to inflation, market fluctuations, risks associated with the funds’ investment policies, and, in some cases, the threat of bankruptcy or license revocation.

A distinctive feature of private pension funds is typically stricter legislative regulation of their activities. In particular, they are required to manage their assets according to the principle of minimising investment risks.

In several countries, the taxation of net assets of trust-based pension funds is carried out at relatively low rates. Additionally, personal income tax collection may vary depending on the type of pension program—whether corporate or individual pension savings—and on who receives the payments, whether the fund participant or their heirs.

At the same time, the introduction of private pensions will require a transition to a system of personal accounts and voluntary contributions. It will also necessitate comprehensive reforms of the social insurance system and the labour market, including further reduction of the number of workers in the “shadow” economy and the maximum formalisation and digitalisation of labour relations.