In many countries of the world with a mandatory funded pension system, financial institutions serving it have been operating for about 20 years. This significant experience can help Ukraine in launching the second cumulative level of the system, and also draw conclusions for our state regulators and conduct some instructive lessons. In particular, the first instruction is that the authorities should ensure proper planning; the second - to provide sufficient time to fulfill the government’s plan.
If the impetus for building capital markets in Ukraine is the completion of a three-level pension system, then in parallel with its development, our authorities will have to improve corporate governance in those companies that want access to second-level assets. By the way, all Western countries have established such practices and disclosure procedures, according to which asset management companies and pension fund administrators provide an open access to the information about the structure of their share capital, financial statements and much more. And in Ukraine, government agencies that regulate the securities market and private pension should require the provision to the public of complete and open information about their work.
In case of violation of the regulatory acts requirements authorities should be able to apply effective sanctions against members of the pension fund councils, as well as against managers of companies working with assets and administration of Pension Fund. Supervisory authorities will have to closely monitor the implementation of administrative systems necessary for the personalized accounting and transfer of money contributions to the second pension level. I think that our officials have already familiarized themselves with the most important aspects of software development and administrative procedures of other countries where there were very serious problems. In particular, in Poland and in the UK there was a significant excess of estimates for the development and implementation of computer programs. And in Sweden, the introduction of the second level was even postponed for a year due to problems in information systems.
That is why it would be advisable to establish a Coordination Committee on the launch of the second cumulative level in order under the Cabinet of Ministers of Ukraine to monitor the progress of its implementation. Also, the National Commission, which implements state regulation in the sphere of financial services markets, should ensure strict compliance with all licensing requirements for administrators of pension funds at the second level. There were plenty of negative examples in this area in Chile, Great Britain, Poland and Hungary.
Foreign experience also indicates that the seemingly insignificant administrative costs of cumulative pension plans in the future can significantly reduce the amount of investment income. For example, let us assume that a participant transfers contributions to the pension fund in the amount of 9% of wages for 40 years and receives investment income for these contributions, which is 5% higher than the inflation rate. So, analysts estimate that administrative expenses in the amount of 1% of all his pension assets will reduce the amount of investment income at retirement by 22%, and expenses in the amount of 2% of assets will reduce this amount at retirement to 40%.
Frankly, the governments of many countries and their regulators did not immediately focus on the cost of these services. For example, Chile’s pension system was created in 1980, but 20 years elapsed before changes were made in the size of administrative expenses, providing a balance between adequate profits for executing financial services and maximizing the amount of savings on individual accounts of pension funds. And in Poland, the administrative fee of the government was reduced from 7% to 3.5% in January 2010, and since 2014 this amount has been reduced by 2 times. A similar situation took place in Hungary - it took 10 years to reduce the fee for administration services to levels that are considered reasonable.
We need to avoid such a serious error with providing administrative services. At the same time, many Ukrainian specialists believe that the second level of pension system should be guaranteed. They propose that if the results of the investment activities prove to be less than the optimal indicators, then these expenses to the participants of the pension fund will be reimbursed at the expense of the state or the asset management company itself. But, as international experience shows, in most countries such guarantees for payments from the second level do not exist.
Another thing is that in Ukraine, a minimum pension from the solidarity system is guaranteed, which it will allow them to avoid impoverishment. True, Hungary introduced a guaranteed pension from the second level at the beginning of its pension reform, but then these guarantees were quickly canceled. And for now the only country in Europe that still guarantees payments from the second level is Poland, where if investment income is 50% lower than the weighted average of all other pension funds, the fund must cover this difference at its own expense. However, over the past 10 years of the functioning of the second level in Poland, only one case of the implementation of this guarantee has been recorded.
So, given the international 20-year experience of the functioning of the second level, several important conclusions can be made:
- The Cabinet must create a Coordination Committee, which would consist of representatives of both the economic and social blocks of the government to control the introduction of the second cumulative level.
- The amount of remuneration charged for the administration and management of second-level assets is a determining factor for the level of investment income and the amount of future pension that people will ultimately receive. The allowed amount of administrative expenses should be kept at a low level, providing a balance between pension fund revenues and the amount of pension savings of pension funds participants.
- National capital markets should take into account the long-term perspective of investing pension funds, including when developing appropriate pension schemes.
- Second-level pension assets should be accessible to Ukrainian enterprises as a source of long-term money, stimulating economic development (especially for small and medium-sized businesses).
- The National Commission for State Regulation of Financial Services Markets and the National Commission for Securities and Stock Market of Ukraine should have qualified specialists to ensure effective protection of assets of the second funded level.