Clare Nuttall in Astana -

Activity has already increased on the Armenian stock exchange in anticipation of an inflow of money after the launch of the country's controversial compulsory pension scheme. Parts of the reforms have been suspended pending a constitutional court ruling, but the Armenian government is determined to push through the changes despite intense public opposition.

Many Armenians have been angered by the requirement, which came into force on January 1, 2014, for all employees born after 1974 to contribute a steep 5% of their gross salaries to private pension funds. While this deadline has already passed, the opposition shows no sign of dropping its campaign to have the plans overturned.

Around 6,000 people turned out in freezing temperatures to join a rally against the reforms on January 18, and more protests are expected. Opposition MP Hrant Bagratyan told the Armenian parliament on February 4 that insistence on the reforms would lead to "a Maidan", referring to the turmoil in nearby Ukraine, ArmInfo reported.

The size of the contribution required is one of the key objections raised - taking into account taxes already deducted, for some high earners the mandatory contribution works out as high as 12% of their net salary. Opponents also believe they should be able to make their own decisions on how to save for the future. While a voluntary version of the scheme was introduced back in 2011, there have been virtually no takers, with most Armenians preferring to keep their money in the bank or invest in real estate.

There is also mistrust about how pensions contributions will be managed, with memories of the loss of savings in state-owned Sberbank after the collapse of the Soviet Union still strong.

The Armenian government has sought to prevent mismanagement by selecting two European fund managers through an international tender process. Amundi, which was set up by French banks Credit Agricole and Societe Generale, and Cologne-based Talanx Asset Management, a subsidiary of German insurance firm Talanx were selected in 2013.

However, the two fund managers suffer from a relatively low profile in Armenia, which has not helped the situation, points out Aram Kayfajyan, CEO of Yerevan-based investment house Armenbrok. "The government is determined to carry through the reforms, but there is a high level of public dissatisfaction. The problem is that the population does not know how to choose their fund, how it will be managed, or what to expect in five or ten years time, and as a result of this lack of awareness a lot of fears are being raised," Kayfajyan tells bne.

"The Armenian authorities have been explaining how the system will work, but it's not enough. People want to hear from the fund managers, and they have not paid enough attention to Armenia so far. We know that the asset managers are very big and the Armenian market is small, but people want to see active participation by the pension funds in our society," he says.

Legal challenge

Government officials do, however, appear confident they can win a challenge against the reforms in the Armenian constitutional court brought by four opposition parties: the Heritage Party, Armenian National Congress, Armenian Revolutionary Federation and the Prosperous Armenia Party. On January 24, the Armenian Constitutional Court suspended some provisions of the new pensions law - including Article 76 which stipulates that penalties may be imposed for failure to make mandatory pension payments - pending a hearing due to be completed by March 28.

At a meeting with labour and social affairs ministry officials on January 24, President Serzh Sargsyan said the reforms "will be called historical, years will pass and your work today will be only granted respect and gratitude," according to a statement on the president's website .

The government argues that the existing pensions system is unsustainable given Armenia's aging population. According to the United Nations Population Fund (UNFPA), the proportion of the population aged over 60 is expected to increase from 14.6% in 2010 to 20% by 2020. Longer life expectancy, a falling birthrate and a high level of emigration are all contributing factors.

With the first payments not expected to reach the pension funds until February 20, there has already been an increase in activity on the Nasdaq OMX Armenia stock exchange in Yerevan. This follows a combination of stock market reforms, the launch of Armenia's first sovereign Eurobond, and the expected influx of money from the pension funds.

In September, Armenia raised $700m with its first ever sovereign Eurobond, dubbed the "Kardashian bond" by international bankers. The finance ministry reported that the issue was substantially over-subscribed, with investors ready to buy up to $3bn. Although - unlike in neighbouring Georgia - this issue has not yet been followed by corporate offerings, it has helped to stimulate the local exchange. The bonds started trading on Armenia's stock exchange on January 31.

Although the two pension fund managers have not yet said how much they will invest in the Armenian market, at least some investments through the stock exchange are expected. The expected influx of money has already brought down the yields on government bonds. According to Kayfajyan, this has made it possible for corporates to take advantage of the margin that has opened up to issue their own bonds. "The stock exchange is working to introduce new instruments and make technical improvements. We expect this will bring new investors to the market. The equity market is very inactive but we hope the development of the fixed income market will push companies to become more active in the equity market as well - though this is unlikely to happen in the next two to three years," he says.

In addition to government bonds and bank deposits, the new pension funds will be able to invest in dram-denominated bonds issued by the European Bank for Reconstruction and Development (EBRD) , which on January 31 issued its first Armenian dram-denominated bonds through an auction on the Nasdaq OMX Armenia. According to the EBRD, the issue was the first publicly auctioned issue by either a foreign borrower or an international financial institution on the exchange.