There is an ongoing debate about whether to transition to an accumulative level of the pension system and how to ensure people receive a decent pension. Nina Guzey, an expert and the executive director of the National Association of Insurers of Ukraine, comments on this matter.
How can the implementation of an accumulative pension system address the issue?
In my opinion, the implementation of an accumulative pension system will not solve the problem in the near future, in the next 5-10 years. However, considering the future, only accumulative pension savings, both mandatory and voluntary, can relieve the burden on the solidarity system and ensure a decent standard of living for future retirees. Even small individual contributions to the pension system will not only clearly demonstrate to the participant the level of their personal savings but also encourage them to make additional contributions to increase their future pension payouts. The introduction of an accumulative system will not only reduce citizens’ paternalistic attitudes, where most rely solely on the state, with the common phrase being ‘I worked all my life, so the state should provide a decent pension.’ It will also serve as a significant incentive to enhance personal responsibility for both individuals and employers regarding the size of their future pensions.
How actively are Ukrainians currently using the services of private pension funds?
Even though year by year, the hopes of an average Ukrainian for a state pension become weaker, the culture of long-term personal savings remains very low. Low living standards and a high level of distrust in financial institutions are the main factors restraining the popularity of institutions such as non-state pension funds, as evidenced by statistical data. There are approximately 85,000 individual depositors in non-state pension funds, and their contributions make up only 14% (360 million UAH) of pension contributions (according to the NCCPFR data as of June 30, 2021). The total value of pension assets under such contracts is 3.7 billion UAH. It’s worth noting that while there is a positive trend in the growth of the number of depositors, it remains very low. These facts indicate that private pension funds are not popular.
What other options for saving money for retirement do Ukrainians use?
Ukrainians are more actively using the services of life insurance companies, which offer savings programs both until reaching the retirement age and for a specified period as stipulated in the contract. Such programs are popular not only because of the accumulation aspect but also because they provide additional insurance coverage (financial support) in case of critical illnesses, traumatic injuries, and other health-related events, including death. As of June 1, 2021, life insurance companies had approximately 1.5 million savings contracts with individuals, and the amount of insurance reserves (the size of obligations for accumulations) under such contracts amounted to 12.7 billion UAH. However, this indicator is also extremely low compared to the European market.
The banking sector also offers deposits for longer terms than one year, but the share of such deposits is very small, and investments with a maturity of 2-3 years are difficult to describe as retirement savings. Those citizens with incomes higher than the average wage tend to invest their savings in real estate with the hope of securing a passive income ‘in old age’ in the form of rental income. Considering that such assets as real estate require substantial investments, this method of pension provision can hardly be called accessible and widespread. The same can be said for savings through investment funds.
In summary, it can be stated that popularizing personal pension provision and encouraging Ukrainians to make additional pension savings should become one of the state programs. Various approaches should be applied, including mandatory pension contributions and incentives for voluntary pension savings, including tax preferences for both individuals and employers.”
