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Essence of Contributory Pension Reforms

Essence of Contributory Pension Reforms

Georgia  to Launch Pension System reformation in 3Q18.

Government of Georgia plans to launch contributory pension reform implementation in the third quarter of 2018. Ministry of Economy has already published the corresponding bill. If the system comes into force, the special pension fund will manage the mobilized funds, accrue interest on  the mentioned money and return this sum to citizens after retirement. The reform is to shift the pension issuance burden from the state budget to citizens. The reform covers a quite long-term period (40 years and more).

All citizens will be automatically involved in the pension scheme, who take salaries under the signed labor contracts. The system partly contains obligatory component. All employees will be obliged to pay due money, however, in 3 months after the system introduction, the employees over 40 years old will be able to voluntarily withdraw from the system and they will be exempted from the payment obligation. This category will have 2 months to withdraw from the system.

According to the contributory pension reform, three parties are involved in the system: employees, employers and Government. According to a preliminary bill, their co-participation component is as follows: the employee pays 2% of his pretax salary. At the same time, the employer and Government are obliged to pay 2% of the employee’s pretax salary each. As to the self-employed, they are free to join the system or not and each self-employed citizen will pay 4% of their incomes, while the government will pay 2% of their pretax incomes. As a result, we receive the following formula: 2%+2%+2%. This signifies that every month 6% of the employees’ whole salaries will be saved (not of the net salaries) and transferred to the contributory pension fund.

Pension payments will be ceased if in the reporting year the employee’s salary  reaches 60 000 GEL. In this case, the employee is exempted  from the obligation of paying pension dues in the reporting year, like the employer and Government.

Except for exclusions, pension savings may be withdrawn only in the retirement age, 65 years old for male and 60 years old for women. However, any participant is able to postpone taking pension savings depending on their needs or request a total sum of their pension savings.

According to the bill, citizens will receive money after retirement jointly with base retirement benefit (current 180 GEL). The sum will not be issued jointly. The Fund will prepare a special calendar for issuing money. The saved amount will be divided on averaged supposed lifespan a pensioner.

According to the 2016 indicators, average lifespan of a man is 68 years and for women – 77 years. This signifies pension savings for males will be divided on 3 years, and for women on 12 years. Since women retire earlier and their average pension years are longer compared to males, their retirement benefits will be smaller on average, compared to males. Since the saved funds will not be transmitted to citizens at once, the Fund will continue accruing interest rate on the remaining part of the funds.

According to the bill, in case of death, the saved funds will be transmitted to the heirs. Citizens will be entitled to request the saved money before retirement if they become persons with disabilities or if they leave the citizenship of Georgia, however in the last case, beneficiaries will receive only 2/3 of the saved funds.

Each beneficiary will receive an individual pension account upon joining the system and will have access  to the information on their own individual pension accounts in digital format. Moreover, everybody will be able to receive information on the existing condition on their own individual pension accounts at any desirable time, based on application to the Pension Agency.

Implementation and administration of the pension scheme will be the responsibility of independent LEPL – Pension Agency.  Investment policy will be separated from administrative issues such as payments, issuance of funds and so on.

The agency will comprise a supervisory board, which will ensure to maximally protect participants’ interests, however, the supervisory board is not to shape and implement investment policy. The investment policy will be determined and implemented by the independent investment board, based on decision on profile of riskiness fixed by participants.

The role of the supervisory board will only determine the whole pension system development vision and administrative issues that in compliance with international practice.

The supervisory board is absolutely separated from decisions related to investing pension assets and this is an advantage of this organizational structure as compared to the practice of other countries and this factor guarantees that the investment process will be carried out on behalf of beneficiaries.

As to investing the mobilized funds, pension assets may be invested only under legislative norms for maximizing positive proceeds in the investment period on behalf of the beneficiaries, in compliance with the principle of reliable investments. Pension assets are invested and related issues are supervised by National Bank of Georgia (NBG). Protection of the process of investing pension assets is guaranteed by the law.

The law sets a general framework in which assets may be invested and determines the type of assets that should not be invested in. The law also determines minimal requirements for investment policy documents. Consequently, risks of dishonest investing of assets will be identified and minimized by the legislation and regulator.

Finally, the contributory pension system bill is being still specified and several details will be revised.

By Merab Janiashvili
Economic Analyst
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