Сумарний коефіцієнт народжуваності (сер

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Transcript Сумарний коефіцієнт народжуваності (сер

UKRAINE’S PENSION REFORM
DEVELOPMENTS and CHALLENGES
Vladimir Yatsenko
USAID Mission for Ukraine, Belarus and Moldova
International Conference on Pension Reforms Implementation
16-17 February, 2005
Sofia, Bulgaria
Multidimensional Impact
of Pension System
 Social well-being
 Political landscape
 Economic development
Social Implications
•
The main priority of any publicly established pension
system should be poverty prevention in old age, during
disability or upon the death of the family’s wage earner
•
Need to provide guaranteed and predictable benefits
•
Need to adjust pension system to changing demographic,
social and economic environments
•
Ukraine has 14 million pensioners out of a total population
of 47 million (30 per cent)
•
Ukraine’s current retirement age is still 60 for men and 55
for women, and pension system dependency ratio is 0.85
Political Implications
• Different political structures require different reform processes
• Pension reform is NOT a race, but a long-term process - the
reform process may be slow because it has considerable risks for
politicians and government bureaucrats
• Politicians prefer that bad news be seen to arise through market
outcomes rather than by their political decisions
• Major reforms in a democracy require use of the political
process to secure changes in social security legislation
• Older workers and retirees form a strong political interest group
(40% of Ukrainian voters)
• Large and fiscally unsustainable increases in PAYG benefits just
prior to 2004 Ukraine’s presidential election
• PAYG & IRA advocates support different political philosophies,
and which system is better is a controversial issue
Economic Implications
•
The difference between PAYG and funding is second
order
•
Effect of pension financing on public deficit and debt
•
Labor market effects
•
National savings and investment
•
Domestic capital market
•
Liberty for the individual is great, just as long as the
stock market goes up! What’s the cost of allowing choice?
Problems and Constraints of Ukraine’s
Pension System (2000):

Inadequate and inequitable benefits

Benefit arrears of 2 - 8 months

Too many pensioners relative to contributors

Administrative inefficiency, poor compliance

Contributions and benefits often paid in-kind

Non-viable revenue systems and benefit levels –
payroll tax of 34 % and benefits 30 % of poverty level

No capital markets for long-term capital investments
Demographic Tree, Ukraine, 2001
male
female
100+
90-94
80-84
70-74
60-64
50-54
40-44
30-34
20-24
10-14
0-4
Impediments of Ukraine’s Pension Reform Process

Reaching a consensus on the reform has been going on for 8 years
and is not finished

Lack of knowledge and experience at all levels (f.i. the
demographic pressure has not become apparent for the public)

Lack of strong pressure groups without vested interests

High political risks (especially during 2004 presidential elections)

Lack of macroeconomic stability

Age distribution of the population

Agricultural sector contributions and payouts (split between
rural and non-rural contributors/beneficiaries)

Weak financial sector and capital market (market capitalization is
about 20% of GDP or just $15 billion; assets of 3 largest companies
make up 48% and assets of 5 largest companies make up 64% of market
capitalization) and its institutions, poor corporate governance.
Ukraine’s long-term Fitch rating BB-, stable
The Ukraine’s Approach (2004):
Tier 1. Traditional Social Security Benefit





Pay-as-you-go
Mandatory
Defined benefit
Government administered
Major source of benefits
Tier 2. Mandatory Individual Retirement Savings (2007)





Fully funded, defined contribution
Mandatory, if more than 20 years to retirement
Administered by the 1st tier administrator
Investment of assets managed in private sector
Minor source of retirement income for lower income workers,
moderately important for middle and upper income workers
Tier 3. Voluntary Retirement Savings




Fully funded, defined contribution
Voluntary
Managed in private sector
Minor source of retirement income for lower and middle income
workers, more important source for upper income workers
Required Preconditions for Creating the
Mandatory Accumulation System (2007 or TBD)

Country has experienced economic growth during last two
consecutive years

Special 2nd pillar law and other necessary legislation adopted

It is ensured that PAYG system benefits are NOT less than the
minimum subsistence level (Constitutional requirement)

The PAYG State Pension Fund remains balanced according to
international accounting standards

It is ensured that the state budget will pay for transition costs

Personified reporting and record-keeping system developed, tested
and introduced by the State Pension Fund

Regulator for the private pension system is operating properly

Experience of operations in private pensions industry is available
Some Important Aspects of Ukraine’s 3rd
pillar Law on Non-State Pensions:

DC accounts within private pension funds (open, corporate and occupational),
commercial banks and insurance companies

21 pension funds (16 open, 4 corporate and 1 occupational) and 47
investment managers licensed as of 01/01/2005

EET-type tax incentives for both employers and workers. Employers are able
to treat contributions as business expenses, and the deductibility of the employer
contribution is given priority. The total tax-deducted amount that may be
contributed by or on behalf of an individual may not exceed 15% of the
worker’s annual gross taxable income (up to 1.4 minimum subsistence level)

Contributions are invested by professional asset managers

Portability of pension assets is mandated

Participants can take their funds not earlier than 10 years before and not
later than 10 years after the normal retirement age (60m and 55f) as a life
annuity, scheduled and lump sum payments (lump sum - in limited circumstances)
Ukraine: Investment Restrictions for the
Voluntary 3rd pillar PPFs (up to):

50% government securities

20% municipal bonds

40% banking deposits and certificates (max 10% with one bank)

40% domestic corporate bonds

40% domestic equities

40% mortgage-backed securities

20% foreign securities

10% real estate

10% banking metals

5% other assets

5% in one issuer (except Government securities and bank deposits)
Ukraine: Investment Restrictions for the
Mandatory 2nd pillar (up to):

50% government securities

20% municipal bonds
50% banking deposits and certificates (max 10%
with one bank)


40% domestic corporate bonds

40% domestic equities

20% foreign securities

5% other assets
5% in a single issuer (except Government securities
and bank deposits)

Key Problems in EE and CIS Countries
Introducing Mandatory IRA System:

Limited time between passage of legislation and implementation, therefore not
enough strategic planning and public education done

Coordinating among different government agencies and sharing of information

Conservative investment regimes. Lack of sound (firstly long-term) instruments
in the domestic capital markets. High volatility and low liquidity of domestic
capital markets. Lack of competition and high concentration of both
capitalization and liquidity in a handful of stocks. Small size of voluntary third
pillar

Knowledge gap between the sellers and buyers of financial services. No faith by
the population in the private sector being able to ensure that the money will be
there when they retire

Contributions compliance and data verification – i.e. reconciling records to cash.
Assigning and administering individual identification numbers

Assuring consistency in accounting rules. Preventing marketing abuses.
Appropriate asset valuation methods. Regulation of charges/fees and benefits
modalities (annuity/capital)
ENDNOTES
1.
Successful pension reform rests on two pillars government capacity and private sector capacity
2.
Miscalculations by Government are a reality, but the same
is true for market failures
3.
Social security privatization implemented thoughtlessly
and mechanically, based on ideological considerations,
increases poverty, inequality and impedes growth
4.
“Everything on earth has its own time and its own season”
(Bible, Ecclesiastes 3, Contemporary English Version)