New attempt of government to move away from distribution mechanism to cumulative pension system

Author : Olexandr Honcharov

Source : 112 Ukraine

Ukrainian Prime Minister Volodymyr Groysman promised that the second cumulative level of our 3-tier pension system will be launched from January 1, 2019. But the National Securities and Stock Market Commission only on March 28 finally announced the completion of the draft law ‘On compulsory funded pension insurance' and on its coordination with ministries and departments
23:27, 10 April 2019


112 Agency

Now, once again we should wait that after approval at the next Cabinet meeting, this draft law will be submitted to the Verkhovna Rada.

Moreover, this bill will have to supplement the existing joint pension system with a second cumulative level, where every working citizen will be able to send his contributions to a personal retirement account and upon reaching the retirement age will begin to receive additional payments from previously made payments.

Also, in the event of premature death of the account holder, the pension savings can be fully inherited by his descendants, which is impossible now with the means of the joint system.

What does the distributional level of the pension system mean in the present conditions? Immediately, I’ll note that as of January 1 of this year, the Pension Fund of Ukraine registered 11,470,405 pensioners (255 thousand people less compared to January 1, 2018, and from 2013 to 2018, number of pensioners decreased by 2.1 million people).

Of the total number of pensioners, 7 010 000 are women (61.1%) and 4 460 000 are men (38.9%). Well, and how many working Ukrainians now workt for one pensioner?

The answer to this question was given by the head of the National Economic Development Council, Olexiy Doroshenko, noting: “At the end of the first half of 2018, the economically active population from 15 to 70 years was 18 million people.

Given the unemployment rate of 8.3%, the number of employed was 16.5 million. There were 11.5 million pensioners, that is, 1.4 workers for each pensioner. "

Therefore, the Pension Fund in the past in 2018 paid UAH 352.7 billion (USD 12 billion), and 352.9 thousand new pensions were granted and 418.9 thousand electronic pension certificates were issued.

7.2 million pensioners received pensions through banks (UAH 240.8 billion – USD 8.5 billion was paid), and 4.3 million citizens received pensions in post offices.

Related: Pensions growth in Ukraine: Key trend of recent years

Only taking into account all these financial and economic indicators and statistical data, the Cabinet of Ministers should proceed to the introduction of a cumulative level and carry out this process in strict accordance with certain conditions. Among them, in particular: the level of economic growth; balance of the budget of the Pension Fund of Ukraine; the creation of appropriate institutional components and much more.

The following should be considered:

- demography (number and age structure of the population, migration processes);

- the state of the Ukrainian economy;

- institutional development of the national financial market;

- features of state regulation (structure and functional organization of state regulators).

The priorities for the introduction of the cumulative level of the pension system are:

- methods of accumulating and investing pension funds - centralized (state) or non-centralized (non-state);

- the payer of pension contributions (employer or employee);

- age categories of citizens participating.

And, of course, the crucial question is how the funds of the funded pension system will be used in the investment process and for what purposes?

For the sake of fairness, it must be admitted that this bill of the National Securities and Stock Market Commission provides that pension assets will be managed by professional asset management companies (AMCs) that will be selected (authorized) on transparent and competitive principles to meet the highest professional and ethical standards.

This bill gives every citizen the right to freely choose an authorized non-state pension fund (APF) or asset management company in which he will form his pension savings.

It also contains strict requirements for the mechanisms of investing money of the owners of personal retirement accounts, that is, exclusively in the diversified and most reliable financial instruments, due to the procedure of administration and storage of assets in banking institutions.

Legislators should introduce a variety of measures to prevent fraud and abuse.

The creators of the draft law “On Compulsory Accumulative Pension Provision” assumed that the basic principle of financing non-state pensions is the long-term systematic accumulation of pension funds (pension contributions and investment income) to ensure the payment of pensions.

Related: Either pension reform, or collapse of social security system in 10 years in Ukraine

At the same time, the funds accumulated by the APF will be invested by the Board of the Fund directly or with the help of an AMC in order to generate additional income necessary to meet the obligations on pension payments.

Using international experience in this regard, deputies will have to take into account the country's political readiness for pension reform, as well as the technical ability to apply positive foreign experience and the availability of the following resources: material and technical; financial; human; time resoures.

So, we have but to wait for the next promise of Prime Minister to introduce a bill on compulsory funded pensions to the Verkhovna Rada.

If only this reform of the pension system again and again did not encounter the fierce resistance of our poorly educated bureaucrats, so that it would be blocked and transferred to the process of "many years of discussion."

What can be emphasized in the end? Neither the Cabinet of Ministers, nor the Verkhovna Rada have yet solved the accumulated pension problems, they have only postponed them for a later period.

They didn’t even try to figure out what had been done wrongly in reforming the pension system of Ukraine in previous years, and didn’t even try to correct the mistakes and miscalculations of predecessors.

Yes, the trouble did not go away, it was only pushed aside again.

Related: No pensions for Donbas: Why retired IDPs cannot get their money

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