Pension reform. Will the new draft law move things forward?

Yurii Boiko, the Commissioner, for Thepage.ua.

Recently, the Verkhovna Rada registered draft law No. 9212 on Accumulative Pension Provision, which opened a new level in thematic disputes and discussions regarding the introduction of the second mandatory level of the pension system. The National Securities and Stock Market Commission (NSSMC), as the main developer of the basic draft law, which became the basis for further amendments, and the key regulator of this segment, analyzed the document in detail and prepared conclusions. In general, the NSSMC supports the adoption of the draft law, provided that a number of important norms are finalized, on which the success of the reform will depend.

As we remember, the previous attempt to adopt a profile draft law was made in the fall, but then the case never came to consideration in the session hall. The analysis of the new document proved that a number of key norms, especially debatable ones, were overlooked by the developers. For example, the investment strategy of the authorized fund, the guarantees for the preservation of pension contributions were not sufficiently disclosed. Decisiveness and speed in decision-making are important, but at the same time quality should not be compromised, especially when it comes to the creation of a new complex system that should function for many decades. We must predict all the nuances «on the shore» and detail the possible scenarios in the text so that we do not «put out fires» in a few years.
Provided that a number of norms are detailed during the finalization of the draft law, it is possible to talk about quality and reform not for ticks. Next, I will consider in more detail the norms that we, as a regulator, would consider necessary to finalize.

Authorized fund. Everything is not so simple

The authorized pension fund is a key institution to be established by the state as part of the reform. This is a pension provider that will take full responsibility for saving and increasing pension savings from the start, and it should be a model for other service providers. The positive thing is that the draft law provides for the creation of exactly one single fund under the close supervision of the state at the beginning, and after a certain period – starting in 2026 – admission to the system of authorized non-state pension funds. A person will not have to face uncertainty when choosing a savings option among a large number of pension institutions. All participants have one entry. And after a few years, a person will be able to transfer his pension savings to any fund of his choice. This is a great option that will help citizens gain initial knowledge and experience of savings and further competition and development of the market infrastructure.

However, the future structure of the authorized pension fund’s investments, as well as the strategy of saving and multiplying savings, remain unclear. In our opinion, it would be appropriate to provide for the authorized pension fund to be established by the State to be in the form of a Life Cycle (Fixed Date) Fund. This form will be optimal, since the fund is created for a wide range of people of different ages, who will have different investment priorities.This would make it possible to provide an individual approach to building an investment strategy for system participants depending on their age, when the level of investment risk decreases as the system participant approaches retirement age. This approach will make it possible to correctly distribute risks at different stages of savings, make administration simpler and clearer, and future results more predictable.

It is also necessary to review the requirements regarding the structure of assets of the authorized fund. The authors of the document suggest that at least 80% of pension assets consist of securities, the repayment and receipt of income of which is guaranteed by the Cabinet of Ministers (that is, from the domestic government bonds). We believe that it is necessary to either abandon such requirements immediately, or limit the effect of this rule for a period of up to 3 years from the date of the launch of the accumulative pension system. The more diversified the portfolio of the fund (and the system in general), the more reliable the savings will be.

Payment guarantees first

The draft law provides that pension payments to participants of the authorized fund will be guaranteed by the state. The question of persons who will choose non-state pension funds for themselves remains open. But we believe that guaranteeing the payment of pension savings is one of the key ones. Citizens’ trust in the system and the state in general will depend on it. Therefore, the regulations on guarantees should be carefully worked out and significantly supplemented. In our opinion, the final text of the law should clearly describe the mechanism of guarantee application, clearly defined objects, cases and rules of their application. Setting transparent and clear terms must be implemented before the system is operational.

The role of the state in the pension reform

A positive aspect of the draft law is that the authorized fund created by the state is managed by an independent council and independent market institutions, and is not under the «manual management» of the state. However, the draft law envisages a fairly significant participation of the government in approving the main subjects of the system, namely the administrator, asset management companies and the custodian of the authorized fund. To some extent, this can be called an intervention in the activities of the authorized fund, which, although it will be state, should become a separate independent institution.

It raises doubts about the validity of combining the functions of the administrator of the authorized fund and the administrator of the Unified Social Register by one institution, which will be determined by the Cabinet of Ministers. This option requires additional discussion, as it currently contradicts the text of the bill itself.

The start of the pension reform

We have repeatedly emphasized that the immediate launch of the second level of pension provision must be preceded by a period of at least 18 months set aside for preparation. During it, the state bodies involved in the reform must develop a regulatory framework, build infrastructure and authorize participants. The creation of software, convenient formats for participants to access the system, and ultimately the creation of databases and registration of persons cannot be solved in a few days. Therefore, the entry into force of the law on January 1, 2022, as indicated in the transitional provisions, as well as the beginning of mandatory payment of pension contributions by the employer already in 2024, look unrealistic.

Summarizing what has been said, I would like to note that the multi-year examination of state bodies, and in particular the NSSMC, will allow to prepare proposals for the final reading, which will take into account a number of possible and not obvious now, but important points. Our goal is to carry out a reform that would inspire confidence in the population and approval of international partners, who are closely monitoring the course of changes in our state. It is joint work and consideration of comments that are the key to success not only when voting, but also when you and I retire and become direct consumers of the final results of the system.

Source: Thepage.ua.