Funded pensions in Ukraine: what are the highest risks and dangers?
11 December 2024 12:30
ANALYSIS
The Ministry of Social Policy has published a draft law that provides for the introduction of a mandatory funded level in the pension system. According to the EP, this level is planned to be introduced on January 1, 2026.
The main feature of such pensions is that pension payments will be based on the amount of savings in each person’s individual account, rather than on a common fund, as in the case of the PAYG pension system. A personal account will be opened for each working Ukrainian, to which contributions from employers and the state will be transferred on a monthly basis.
The accumulated funds will be invested to protect against inflation and grow. Importantly, these funds will remain the property of the person and can be inherited.
The pensioner will be able to choose how to receive their savings: either in the form of a lifetime pension or for a certain period of time. In the case of a lifetime pension, payments will continue until the person’s death. If you choose a pension for a certain period, the person will determine the duration of payments, but if this period ends, payments will stop. In case of a life pension, the right to inherit the accumulated funds will be preserved for only 10 years, and in case of a pension for a certain period – for the entire payment period.
Access to the accumulated funds will be possible only after reaching retirement age (60 years) and subject to 35 years of work experience.
In a special commentary for Komersant ukrainskyi, economist Oleg Pendzin shared his thoughts on the upcoming introduction of a mandatory funded pension system.
According to the expert, the draft law, which the Ministry of Social Policy has already submitted to the Verkhovna Rada, has not yet been considered by parliamentary committees. However, the economist expressed doubts that the system will be implemented in time.
“This bill has actually been postponed for a year. Earlier, the government promised to introduce funded pensions on January 1, 2025. Now it has been postponed to 2026, and I have serious doubts as to whether it will be possible to implement it even within the new deadline,”
– he said.
The new system will not replace but complement the existing one
Pendzin explained that the introduction of the funded pension system does not cancel the pay-as-you-go system. According to the economist, both systems will exist in parallel. Those who receive pensions now will continue to receive them, while the funded system will apply only to new pensioners.
He clarified that everyone who has ever paid a single social contribution is entitled to a pension under the PAYG system, and the funded system will supplement this payment. However, access to the accumulated funds will be open only after reaching the retirement age (60 years) and having 35 years of work experience.
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Advantages and disadvantages of the funded system
Pendzin noted that the main advantage of the funded system is the possibility of inheriting savings.
“All funds accumulated in individual accounts remain the personal property of a person and can be transferred to heirs,”
– he explained.
However, there are also negative aspects, including the risk of depreciation of accumulated funds due to inflation.
“Ukraine’s economy is quite weak, and the likelihood that savings will depreciate is very high. For example, inflation in 2022 was 27%, and even the most stable investments, such as domestic government bonds, currently yield only 16% per annum. This means that in the event of high inflation, your funds may not only fail to generate income, but also lose in nominal value,”
– says Penzin.
Increasing pension contributions for Ukrainians
Penzin also spoke about a possible increase in pension contributions for Ukrainians. According to him, with the adoption of this bill, a second mandatory level of the pension system will be created, and citizens will pay 5-6% of their income to the accumulation fund. This means that people will be forced to pay more, which certainly raises questions about the feasibility of such a system.
Pendzin emphasized that the new system of funded pensions will not be introduced for people over 45, as they simply do not have enough time to save a significant amount for retirement.
“For those who have less than 15 years left before retirement, the funded system will not work, as they will not have time to save enough,”
– the economist noted.
Pendzin also touched upon the issue of the replacement rate, a percentage that determines how much a pension covers a person’s income in retirement.
“In Ukraine, the average replacement rate is only 25%, while according to the standards of the International Labor Organization, it should be at least 60%,”
– explained the expert.
He added that in order to achieve a pension that would be at least 60% of income, it is necessary to have not only a pay-as-you-go system, but also a funded system, as well as voluntary contributions to pension funds.
“The funded system is an important element to ensure a decent pension in the future. However, given the economic realities of Ukraine, there are high risks of depreciation of savings. We have already seen similar systems fail in other countries, including Russia and Turkey,”
– Oleg Pendzin summarized.
According to the expert, if the accumulation funds are successfully implemented, it will help to ensure a higher level of pensions, but in an unstable economy, this process may be accompanied by great risks for future pensioners.
Thus, the funded pension system proposed by the Ministry of Social Policy has many potential advantages, but its implementation in the context of Ukraine’s economic instability raises serious concerns. Economists point out that under the current economic conditions, a significant portion of the funds may simply be devalued due to high inflation and economic difficulties. In addition, given that the system is mandatory, Ukrainians will have to pay an additional 5-6% of their income to the pension fund, which may become an additional burden in the absence of stable economic conditions that would ensure the growth of their savings.
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Author: Darina Glushchenko
