Muzzy prospects of Ukraine's funded pension system

Author : Yaroslav Konoshchuk

Source : 112 Ukraine

Cabinet of Ministers set out to the implementation of the accumulative pension system in Ukraine
15:10, 19 October 2017

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Pension reform steps

On Wednesday, the government's pension reform adopted by the parliament on October 5 entered into force. In addition to increasing the length of insurance experience necessary to obtain the right to retirement, it also introduces a funded pension system. Thus, if the Ukrainian has been legally working for some 25 to 35 years, he will be able to obtain two pensions: traditional state one (contributions to the pension fund and budgetary subsidies) and funded one. However, in accordance with the logic of the legislator they will have to save money for the second pension themselves. The government version of the pension reform assumes that "all insured persons" will have to pay contributions to the Accumulation Fund. The second level of the pension system starts from January 1, 2019. While still in summer, the Minister of Social Policy, Andriy Reva, assumed that the funded level of the pension system will start working in 2021.

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This is not the government's first attempt to introduce a funded pension system. Back in the early 2000s, domestic legislators announced the need to introduce a funded pension system, but in practice, everything was limited to the emergence of non-state pension funds. In 2015, in accordance with the plans of the government of Arseniy Yatsenyuk, it was to start on January 1, 2017. It was assumed that the amount of the contribution to the accumulation fund will be 1-2% and will reach 7% of the salary in 2022.

Despite the official absence of a funded pension system, Ukrainians have the opportunity to save themselves for a second pension, investing their own funds in non-state pension funds (NPFs). However, investing at their own risk because of the lack of guarantees of funds deposits. According to the Ukrainian Association of Investment Business, Ukrainians as of 2016 can bring money to 52 non-state pension funds (for their second pension). Another eight funds are corporate. In particular, pension funds have been created for their employees in the National Bank of Ukraine, Ukreximbank, Stirol Concern, and Ukrposhta. A number of funds have been created by the trade unions. About 800 thousand people save money for their future pensions on themselves, and the assets of all funds make up just 76 million USD, in particular, because of the weak effective protection of the NPF's depositors.

A new tax or a second pension?

The government does not even have an idea of how the accumulative pension system will look like. And, despite the fact that the bill approved by the parliament envisages launching of a state funded fund, it does not exclude that a private structure or structures will operate at this level.

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Minister of Social Policy Reva commented on the question about the mechanism of the work of the accumulative pension fund: "We need to discuss the issues that you are talking about." At the same time, he believes that the employee should for the second pension on his own.

"In accordance with the bill, the contributions must go to the state fund. But I believe that these contributions must go to non-state funds. The worker himself must pay, this should be his money. The rate (payment to the accumulation fund, - Ed.) is also a controversial issue," the minister said. He added that "all international experience in this area" should be taken into account and the risks of the crash of pension funds should be reduced.

According our sources, Ukraine’s Cabinet of Ministers is discussing the creation of an accumulation fund at the level. It is assumed that all working Ukrainians will contribute to it, and the amount of the contribution will reach 7% of the salary. However, until now neither the form of ownership nor the organizational structure is finally defined. As noted by our interlocutors, there is a risk that a deficit of the Pension Fund will be financed from the accumulative fund, that is, in fact, it will be an additional tax.

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In the meantime, the government has just developed a plan to introduce the second level of the pension reform in Ukraine (the funded pension system) and approved it.

It is expected that by 2018 bills on the criteria for selecting non-state pension funds - subjects of the second pillar pension system - should be drafted and sent to the parliament. As well as legal grounds forcreation of conditions for the free movement of capital; on the introduction of new financial instruments for investment; on ensuring transparency of activities; on improving the requirements for pension asset managers; on determining the rules for selecting and replacing a non-state pension fund that takes into account insurance contributions into the system of accumulative pension provision.

Although experts support the idea of introducing pension savings, they criticize the idea of creating a state pension fund with mandatory contributions.

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Expert from the Reanimation package of reforms Olexander Tkach says, because of corruption risks, citizens have less chance to save their own funds in the state fund. He also notes that, despite the reduction in the burden on the pension fund after adoption of the government bill, there is a risk of equalization of the pension (pensioners will receive the same pension from the state, - Ed.).

In turn, a leading researcher at the Institute for Economic Research and Policy Consulting, Olexandra Beldiy, notes that in Ukraine today there are no conditions for creating an accumulative level, and it is unlikely that the state will be able to create them until January 1, 2019. She believes that people today "do not trust the authorities and have no confidence in the future" and, accordingly, will not invest money.

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According to the Minister of Social Policy Reva, the Cabinet is preparing a concept for completing the pension reform. And in a few months they promise to present it to the public and discuss it.

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