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Recent Ukrainian pension reform overview
Dentons, Kyiv, Ukraine,
Thu, Dec 14, 2017
Recent Ukrainian pension reform overview
Ukraine has been trying to reform its crawling pension system in order to support its retired citizens with sufficient pension welfare and attract pension charges into the development of its economy. At present, the pension system includes Level 1 where retired Ukrainians receive pension on a solidarity basis depending upon length of service and amount of salary, and Level 3 where employees make voluntary payments to non-state pension funds. The system is fully missing Level 2 where employees/employers make mandatory payments to state or non-state pension funds.
According to recent data of the Ministry of Social Policy of Ukraine, the total value of pension assets accumulated on Level 3 is only UAH 2 billion (approximately EUR 61 mio) and half of this amount is held alone by the corporate non-state pension fund of the National Bank of Ukraine. Meaningless development of Level 3 confirms that Ukrainians do not put much confidence in private institutions and are not ready to voluntary deposit their money for a long time.
The situation is aggravated by that 10 mio working employees are supporting 12 mio retired individuals. This resulted in 2017 in deficit of UAH 143 billion out of total UAH 284 mio pension budget.
In an effort to improve the situation, in October 2017 the Parliament introduced certain changes to the pension laws and the Government adopted a “roadmap” which outlines basic steps towards establishing legislative and regulatory framework for Level 2 pension system of mandatory accumulation of pension assets. The recent changes and roadmap initiatives are outlined below.
Recent legislation changes
Length of pension qualifying period will increase
Under Ukrainian law, pension qualifying period is the period during which a person or an employer was making mandatory insurance payments to the Pension Fund of Ukraine. Eventually, by 2028, a pension qualifying period will gradually increase from 15 to 35 years.
Insufficient qualifying periods entitles to minimum pension
According to the new rules, the minimal amount of pension cannot be lower than minimum subsistence income. This reform mainly concerns those retired individuals who receive a minimal pension of UAH 949 due to lack of qualifying period. The amount of their pension is now directly tied to the level of minimum subsistence income, which is currently set at UAH 1,373. The minimal pension for those who have a full qualifying period is set at UAH 1,452.
Pension amounts to be reviewed annually
The amount of pension will be annually reviewed, taking into account (i) the increase of average salary and (ii) the rate of inflation in the preceding year. It is expected that starting from 2021 due amounts of pension will be re-calculated by inclusion of inflation index which equals 50% of inflation rate over the preceding year and 50% of average salary increase rate over the last 3 years. In 2019-2020, indexation will be implemented by means of a separate decision of the Parliament.
Special pensions cancelled
The reform extends the scope of general rules of calculation of pensions to those groups of employees who have previously received various pension benefits. Pensions of state employees, prosecutors, judges, scientists, teachers, healthcare workers, as well as the number of other groups will be accrued based on general rules and principles.
15% tax rate for employed pensioners repealed
Employed retired individuals are no longer required to pay 15% tax on their pension amounts.
Mandatory accumulation system
It is expected that Level 2 pension system will be launched from 1 January 2019. The roadmap sets forth the following steps to be undertaken in 2018 in order to make this happen:
- Outline general requirements for both voluntary and mandatory programs of participation in the accumulative system. This will require determination of who should pay – employer or employee or both and may result in increase of the rate of the single pension charge (currently 22%) payable by employer andor introduction of additional pension charge for employees.
- Determine whether accumulative system should be state or non-state or a combination of both.
- Introduce criterion for selection of non-state pension funds and requirements for companies that manage pension assets, as well as ensure transparency of activities and reporting of pension funds.
- Establish financial instruments where accumulated pension amounts can be invested.
- Secure the rights of participants of the accumulative pension system.
- Determine conditions of participation in the professional pension accumulative system. This may involve employees working in harmful and dangerous conditions.
- Breakdown of authority between the National Commission for State Regulation of Financial Services Market and the National Commission on Securities and Stock Exchange regarding oversight of entities operating within the accumulative pension system (mainly, non-state and state pension funds).
- Vest the National Commission on Securities and Stock Markets with the right to detect and prevent fraudulent actions (market manipulation, insider trading, etc.) by the pension funds.
The Government estimates that it would take about 1 year to implement those steps. As the implementation will require amendment of the laws by the Parliament this estimate, unsurprisingly, may appear to be too optimistic.