Private old age: What is the future of Ukraine's non-state pension funds?

Author : Mykhailo Pozhyvanov

Source : 112 Ukraine

Ukraine’s government continues to promote pension reform, and the accumulative pension system will fully operate on January 1, 2019
16:00, 16 March 2018

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112 Agency

Ukraine’s government continues to promote pension reform, and, according to bill No. 6677, which I am trying to finalize, the accumulative pension system will fully operate in Ukraine on January 1, 2019. What does it suggest? From the next year, Ukrainians under the age of 35 will be required to save for the retirement. During the first year, 2% of the salary will be charged, but the contribution will grow by 1% annually until it reaches 7%. For those who are over 35, participation in the funded system will be voluntary. Another innovation is that the system of accumulation for retirement will be provided by the non-state funds.

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What is the Ukrainian market of non-state (private) pension funds (PPF)? First of all, it is rather uncertain. A couple of years ago, 23 legal entities had the license of the PPF administrator, while 20 pension funds managed assets of 75 million USD. This figure could be much larger if from 2009 the interest in PPFs in Ukraine did not begin to sharply decline, which was due to the beginning of the financial crisis and the collapse of the stock market. In Ukraine, there were no large funds or assets that could be invested.

After the financial crisis of 2008-2009, the market for non-state pension provision in Ukraine fell into anabiosis - the value of assets in the management grew, but there were practically no new contributions. The main way to get new customers was to purchase funds. Why are things with PPFs so bad?

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Of course, this is not just financial crises. PPFs do not have special prospects without economic growth and the implementation of a full-fledged pension reform. Another important point is the regulation of the activity of asset management companies. Scandals associated with fraud in the securities market, appear with enviable constancy. Sometimes, investors just cannot even return their money. At the same time, two commissions that oversee this market, namely the National Financial Service and the National Commission on Securities and Stock Market (NCSSM), are engaged in a frank ping-pong, shifting responsibility to each other.

If earlier the regulation of the activities of the PPF was under the jurisdiction of the National Financial Service, then the reorganization started in this sphere should transfer the function of supervision and regulation of the activity of pension funds and real estate funds to the NCSSM. According to the plan, one regulator will deal with the supervision, and regulation of the activity of the funds. But what should we do with the issue with funds that have ceased to fulfill their obligations to depositors?

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Ukrainians are often deceived by investors. The story of many bankrupt banks has sufficiently tempered our fellow citizens.

How will future retirees perceive such a novelty? Those of the 35-year-olds, who do not like this scheme, might join the army of labor migrants. The rest will be forced to play by the new rules. And here the main danger lies not only in the fact that depositors can remain without contributions. Trouble number one is associated with inflation.

High inflation in Ukraine is the main risk factor because it might eat all this "long" money. They could be invested in the country's economy, its infrastructure, and shares of profitable enterprises.

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An even more optimal option would be to invest the PPF contributions in currency and gold, as well as in securities of leading western states, but the Ukrainian government will not go on lending to foreign economies, preferring to destroy its own one. Thus, no one can guarantee the safety of investments in pension funds. Extremely weak and unstable hryvnia, the lack of good management, the correct and productive turnover of money entering the PPF accounts are the crucial factors here.

Will the latter become the best alternative to the compromised state Pension Fund? The funded pension system was planned to be introduced back in 2004, and the 14-year delay played against Ukrainian pensioners is now far from the best moment for such innovations.

In any case, the negative experience of Russia, where more than 30 PPFs went bankrupt, leaving 2.2 million pensioners without savings, is very relevant. It is possible, of course, to gloat and remember that the neighboring state pays its price for the war that it has started, But Ukraine is compelled to take part in this war too, and no one knows when it ends.

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However, the state machinery of Ukraine to strictly monitor has promised to strictly monitor the circulation of funds in PPFs and to reduce the number of potential bankrupts to a minimum. The existing solidary system must be destroyed, like Carthage, and this is the only clear moment in this whole story.

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