How cumulative level of pension system will affect earnings of Ukrainians?

Author : Olexandr Honcharov

Source : 112 Ukraine

The cumulative level of the pension system functions today in 24 countries of the world
10:12, 14 November 2018

112 Agency

So, the second - cumulative level of the pension system to start operate in Ukraine from the beginning of 2019. It should be noted that in most developed countries, pensions are made on the basis of a two systems combination: state (distributive) and non-state (funded). The cumulative level of the pension system functions today in 24 countries of the world, and among them Poland, Bulgaria, Croatia, Hungary, Latvia, Estonia, Kazakhstan and others (in 17 countries there is a centralized accumulation of pension funds, in 7 countries there is a decentralized one). At the same time, in 3 out of 24 indicated countries, there is a centralized management of assets at the cumulative level, and in 21 countries – the decentralized (non-state) one.

Well, without exaggeration, it can be argued that pension reform in our country is an essential component of social and economic reforms, including health care and social insurance. And the priorities in the next 2019 on the way to the accumulative level introduction in Ukraine are, firstly, the methods of accumulating and investing pension funds - centralized (state) and non-centralized (non-state); secondly, the payer of pension contributions - an employer or employee; thirdly, the age of citizens participating in pension provision. The key question of fundamental importance - How will the funds of the non-state funded pension system be used in the investment process, for what purposes?

However, at present, unfortunately, we have not yet created sufficiently developed organizational, economic, legal conditions and forms for the effective functioning of pension provision, especially often the negative facts manifest themselves in the management of assets of non-state pension funds. Nevertheless, there is still hope that the result of these transformations should be the receipt of the total pension payments at the level of 50% -60% of the average salary (instead of the current 30%). And then it will meet international standards of social security.

Moreover, about half of these payments will be funds accumulated in non-state pension funds, respectively, the role of such funds in Ukraine will grow every year. And most importantly, all employers and employees will have to accumulate funds for future retirement sooner or later. Therefore, the introduction of the cumulative level from next year should be carried out only under certain conditions. Among them are economic growth, a balanced budget of the Pension Fund, consideration of demography (number and age structure of the population, migration processes), institutional development of the Ukrainian financial market, national features of state regulation (institutional structure and functional organization of state regulators), and much more.

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Using international experience, one should take into account the political readiness of the state to introduce fundamental changes in the pension system of Ukraine, as well as the technical possibility of applying the positive practices of our Western partners. In this regard, since January 1, 2019, we need the availability of material, technical, financial, human, time resources to adapt international systems, methods and mechanisms to Ukrainian realities. At the same time, demographic trends in many countries of the world remain extremely important and alarming. Our country is no exception.

The population of Ukraine is aging rapidly and we need to think now how to ensure the financial stability of the pension system for a long period. Just look at the following figures of the Demography and Social Research Institute. According to their data, the proportion of people of retirement age in the total population of our country, for example, in 2009 was 26%, and in 2050 it will be 38%. For the national pension system, this means that 10 people of working age will provide 4 people of retirement age, and by 2050 there will already be 8 pensioners for 10 people of working age! Of course, the situation is disappointing. It is not easy to make a decision on this issue now, but if this problem is not solved today, it will be much more difficult to solve it later.

That is why the introduction of the second level of the pension system is scheduled for January 2019. Well, and accordingly, from the salaries of working Ukrainians and their employers, funds will be collected separately into a savings fund. As a rule, tariffs of contributions to the second level in countries where there are both I-st and II-nd levels of pension system range from 6% to 8% of salary, since smaller contributions will not provide long-term payments of sufficient size, and larger contributions will create a large load on the first level. Level II pension schemes are schemes with defined contribution. This means that the payments will be based on the cumulative amount of contributions plus total investment income and minus all administrative expenses.

As our legislators have determined, at the second level there will be three main service providers - the administrator, the asset management company and the custodian bank. The cost of their services to be reimbursed by the participants. During the first two years of operation of the second level, the Pension Fund of Ukraine will perform the administration function for all participants in this pension system. Then, the PF will also continue to provide administration services to the participants if they do not elect a non-state pension fund to invest their contributions. In this case, the function of maintaining personalized accounting will be performed by the PF administrator.

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And, of course, it is of fundamental importance how the funds of the non-state funded pension system will be used in the investment process, for what purposes. Now the placement of pension reserves in existing government securities, for example, government bonds support the controversial economic situation. Debt state obligations represent a tax from future generations, and higher taxes in the future indirectly reduce the real incomes of pensioners themselves. In order to repay the debt to pension funds in the future, a higher tax burden on goods and services, higher prices and tariffs will be required.

Quite controversial areas of investment of pension reserves from the accumulative pension system are:

- financing of the current state budget deficit;

- maintenance of previously taken debt, the repayment of previously placed loans;

- financing of social, defense and other programs;

- smoothing fluctuations in the receipt of tax payments by the budget.

As well as such areas of investment as:

- provision of guarantees on state debt obligations to financial institutions with secondary reserve assets;

- supporting competition in financial markets, preventing the diversion of financial resources from the country.

In this regard, and in order to ensure the effective pension reform, more than once the Cabinet and the Verkhovna Rada will have to make significant changes to the organizational and economic mechanism of non-state pension provision. This applies to functional changes in the investment process of the cumulative level, and to the legal support of its actions, and to institutional changes in financial institutions, as well as to the development of specialized financial and investment forms with active state participation. The main thing is to work on this and not lie idle.

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