The introduction of a three tier pension system: what will change for Ukrainians


Announced details and calculations.

In the near future Ukraine plans to carry out pension reform. This was stated by Prime Minister of Ukraine Denis Shmyhal. This is one of the issues that was discussed with the IMF in preparing a new loan program for Ukraine. What issues have been discuss and agreed on will become clear after June 9. On this day, as expected, the question of the loan for Ukraine should be considered at a meeting of the Board of Directors of the International monetary Fund. After that, the Memorandum will be published, promised in the government, reports the with reference for Today.

Probably after this public show and the achievements of the government regarding pension reform. Even on a press-conferences the President of Ukraine Vladimir Zelensky said that the Ministry of social policy was asked to present a concept of pension reform to the public “soon”. The draft law “On mandatory accumulative pension system” may 20 was unplanned is included in the agenda of the current session of the Verkhovna Rada, so he probably will be considered before the parliamentary recess.

However, even before the official promulgation of the pension reform became one of the most discussed topics in the media. Which is not surprising. In recent years this is not the first announcement about pension reform. However, unlike all the previous “pension reform” that led to the penny, except that the increase in pensions, but this can really fundamentally change the pension system in Ukraine. It will improve or worsen these changes, the situation with pensions? We have gathered information about what is known about the upcoming pension reform.

Two or three pensions instead of one

The main innovation can be the introduction of three-level pension system, as is customary in most developed countries.

Today the majority of Ukrainians are well-known only one form of pensions – joint, when the money to pay pensions, collect “now now” (from the salaries of working citizens in the Pension Fund deducted the unified social tax, UST, and the amount collected goes to pay pensions to current retirees). It is considered the first level. However, in reality the pension system in Ukraine is two-tiered. In 2003, a law was passed that was introduced in Ukraine voluntary pension savings (the third level).But the popularity of voluntary-funded pension in all that time not acquired. In fact, they were simply allowed, but the state virtually nothing done to ensure that this phenomenon is the mass.

It is not known whether in the course of the new pension reform anything done for the development of voluntary pension savings, but the government claimed that in the near future I plan to introduce in Ukraine another type of pension coverage of the compulsory accumulative pension contributions (considered the second tier of the pension system). Obviously, the introduction of a new pension will be the main component of the new pension reform. However, not the only one.

Will introduce compulsory pension accumulation

The draft law “On mandatory accumulative pension system” was registered in the Parliament in winter. He suggests that to make mandatory contributions to retirement accounts will need workers, and employers. With the already accrued to the employee wages at his / her individual pension account will be transferred a minimum of 1% (at the request of the employee, the percentage may be increased), and the employer will be obliged to transfer to the same account for 2% of the salaries. Also in the accompanying documents are the calculations which show that the percentage of deductions is scheduled to increase. Thus, the drafters of the bill came from the fact that in 2021 the percentage of mandatory funded pension contributions will be 3%, in 2030 – 4%, even after 10 years it will be 6%, and in 2050- 7%.

At the same time, to avoid overloading employers with taxes, the government planned to reduce the size of the ECB. However, recently the Prime Minister talked about another option, how will it change the tax burden on employers.

“Discusses this option: 2% of current ERUs allocated to savings, not increasing the burden, neither for the firm nor for man, and 2% charge on income tax of physical persons (NDFL). The 4% guarantee in today’s prices in retirement to 1 million UAH”, – said Denis Shmyhal.

However, as a result of revenues to the Pension Fund will decrease. Perhaps this was the subject of discontent from Mwfo the discussion of pension reform.

Also, the bill proposed to establish for the administration of these contributions the new Agency – the Pension Treasury. However, this proposal caused a lot of controversy. Perhaps this is the main outstanding issue, which the final concept of the pension reform, the government still has not submitted.

“If we talk about the launch of the second level of accumulative system of compulsory state pension insurance, the basic discussion is in terms of institutional infrastructure to implement the system. Most working group members believe that to run the system you need to use the existing institutions – the state (tax office, Pension Fund of Ukraine, Treasury) and private (non-state pension funds involved in their operation – AMC, ACE, banks-custodians, IC, TCB, etc.). And from creating extra unnecessary institutions at the expense of budget funds should be avoided. We also adhere to this position because we believe that such a construction minimizes the risks of corruption and monopolization. Also the launch of the system on the basis of already existing institutions will promote the development of voluntary pension savings and this is one of the goals of pension reform is to encourage citizens to accumulate. Only full-time job all three levels of the pension system is able to provide a decent income in retirement,” says the Director of the company on assets management “Vsesvit” Yaroslav Savchenko.

Can appear professional funded pension

The reform is expected to introduce also a subspecies of funded pensions as “occupational pension”. In mid-may, the Ministry of social policy issued for public discussion a draft law “On amendments to some laws of Ukraine concerning funded occupational pension system.” As follows from the explanatory Memorandum, the representatives of several professions completely shift from solidarity pensions to professional cumulative.

The government offers three types of occupational pension programs. Program # 1 will operate for the representatives of professions with harmful working conditions (the so-called “list of occupations No. 1). These include miners working underground, metallurgists, working in hot shops, breathing metal dust and other harmful substances, the workers of the chemical industry, etc. Employers will have to pay to the pension accounts of these workers in addition to 22% of ERUs in the joint system and even 15% in professional storage. The participants of this program will be able to retire at 50 years (with experience in hazardous work a minimum of 10 years for men and 7.5 years for women).

Program # 2 is designed for the professions of “list No. 2”, which includes those whose work was “associated with increased neuro-emotional and intellectual stress or performed in special natural geographical and geological conditions of high health risk”. This group includes geologists, “chemists”, electricians, aircraft mechanics and divers, public transportation drivers, etc. On their savings accounts, employers will have to deduct 7% of salaries, to retire will be age 55 if you have the necessary experience (12.5 years for men, 10 for women).

And finally, pension plan No. 3 is the program for all other professions, if the company is a party to any occupational pension Fund or create a Fund. Here the employer must pay 3%, the pension payments you can receive, too, after 55 years.

The pension Fund will be forced to “earn”?

The idea of reforming the Pension Fund soars, but the final decision on this matter has not yet announced. Supporters of reform believe that the PFC should be able to increase money which come from ERU. For example, buying, and private pension funds, government bonds, considered to be a reliable financial instrument. Opponents of this idea believe that even government bonds is the risk, and the risk pensioners ‘ money should not Fund. Yes, and money is the PFC no – everything going from the SST, then paid to pensioners, and the state budget subsidizes almost half of the required amount.

“The Pension Fund of Ukraine a specific function, its task – to collect contributions and pay pensions. PFCs are inherently unable to do investment and earn money. Also, the PFC is the fiscal function and the function of keeping the register of insured persons. No need to invent PFCs have unusual functions and even more compared with private pension funds, are two different institutions, each of which must perform their role,” – says head of Rada of the Ukrainian Association of administrators of pension funds Elena Sotskova.

How can change pensions

Now in Parliament there are other bills dealing with changes to pension legislation. For example, the Cabinet submitted to the Verkhovna Rada a bill to replace paper work books to electronic. This allows you to assign pension automatically. Other bills increase the requirements for non-state pension funds, which will collect cumulative contributions, make the appropriate changes to the Tax code and other laws, because of the funded pensions had almost never mentioned. The new system can start operating in 2021.

The main purpose of these changes is to try to eliminate the growing hole in the Pension Fund and to prevent a further decline in the level of retirees. And if possible – to increase it.

“If nothing changes, by 2030 the replacement rate will be 18 %, i.e., at a salary of 10 thousand UAH, the retirement persons can receive only 1800 UAH. And if you will work in all three levels of the pension system, the replacement rate could rise to 58 %, ” – said Elena Sotskova.

The minimum level of pensions, which require Ukraine international instruments – 40% of the average wage.

“Based on calculations, the start of a funded system with contributions at 4% will provide replacement ratio at 0.4 (40%) in the presence of provided for by the legislation of Ukraine insurance experience. Provided a gradual increase in contributions up to 7% replacement ratio close to 0.5 (50%). To provide a higher replacement rate can be due to additional voluntary savings. After all, the more sources of income in retirement – the better. Ideally, the pension should consist of three parts: the pension from the solidarity system (1st level), pensions from the mandatory funded system (2nd level), the pension system, and voluntary individual pensions (3rd level). The first two components together should provide a replacement ratio at the level not lower than 0.4. This minimum level was recorded by the International labor organization in 1952 of Convention No. 102 “On minimum standards of social security”. Mentioned Ukraine had ratified the Convention in early 2016″, – says Yaroslav Savchenko.