Shmygal predicted "the end of pensions". Whether Ukrainians can secure their old age

The current state of non-state pension provision, according to experts, requires revision of the existing model. Market participants attribute such harsh criticism to the fact that the existing non-state pension funds do not fit into the new concept of pension reform that the World Bank is considering.

Who is right, experts or market players - we can argue for a long time. We are interested in another thing: is it worth saving for retirement in the NPF or will it be like with the savings bankbooks in the USSR: we collected all our lives, and then we got a shish?

Spoiler: neither banks, nor pension funds, nor countries themselves are insured against the collapse of the country. If the country collapses, the savings - any savings - burn up.

So, according to the data posted on the website of the National Commission for Financial Services, there are 57 non-state pension funds in Ukraine, the total number of NPF participants is about 840 thousand people. Total pension contributions amount to slightly less than UAH 2 billion. Almost 90 per cent of assets of Ukrainian NPFs are invested in bank deposits and internal state loan bonds of the Ministry of Finance (OVGZ).

Let's start with money

According to experts, NPFs in Ukraine are very expensive for participants, as they charge on average more than 4% of the accumulated pension capital annually.

We asked this question to Grigory Ovcharenko, Chairman of ICU Local Asset Management Division (AMC Investment Capital Ukraine)

:

Why the non-state pension system and why does it cost as much as it does?

According to him, such a high percentage is due to the fact that NPFs assume all costs associated with the purchase, storage and maintenance of customer investments.

Grigory Ovcharenko listed the main advantages of NPFs over self-investment:

• this money can not be withdrawn before reaching pre-retirement age, and cases provided by law - disability, travelling abroad, etc., That is, it is a protection against the possible consumption of savings. And this is a big plus.
• savings in the NPF are not subject to income tax.
• "cashback" from the state.

Here's an example: Deposit vs. NPF. The average rate on deposits is 15%, minus tax 18%, minus 1.5% military levy. On NPF - 10%, although there is no guaranteed fixed rate. According to Grigory Ovcharenko, the NPF client earns 10%, (Ovcharenko says the average yield on instruments is 15-18%, and the costs are on average 4%), but does not pay taxes on them. In addition, the state returns to NPF depositors 18% of the deposit amount.

I would like more money!

There is an insufficient choice of investment instruments in the Ukrainian market," USAID experts believe - pension assets are placed mainly in government bonds and bank deposit accounts. According to the National Commission for Financial Services, in 2019, funds invested mainly in government securities (45.9%) and deposits in banks (38.5%). Much less was invested in bonds of Ukrainian companies (7.5%), real estate (2.8%) and shares of Ukrainian companies (1.4%). All NPFs in Ukraine invest very similarly.

- Indeed, the capital market is more developed, including the stock market, which makes it possible to earn more. - grigory Ovcharenko believes.

However, Ukraine does not belong to such countries. We should be compared with countries that do not have a well-developed capital market. These systems also work quite well, and there is even a big plus - they minimise risks at the launch stage.

What about protection?

Legislative requirements for NPF activities are very high.

• NPF cannot be declared bankrupt, cannot use any methods that are used in Ukraine for bankruptcy of enterprises - it is prohibited by the law "On Non-State Pension Provision"
• The Fund cannot assume obligations, except as provided by the law. This means that the NPF cannot expand the scope of its activities,
• The Fund cannot be renamed
• The investment activities of the NPF are very conservative, it does not engage in high-risk investments. This means that it has no opportunity to get into a debt hole, to take loans. The NPF has a legally defined list of expenses that it can incur, and then within certain limits. This means that from the point of view of both theory and practice it is difficult for him to "get into trouble".

If the fund is closed, there is a two-stage "handover" scheme. All participants are informed about the closure of the fund three to six months in advance. The participant can transfer the money himself.

If the money is not transferred by the participant, the fund holds a tender among other NPFs for the transfer of assets. Or the founders of the fund, which is being closed, decide to transfer all assets at once by tender. It is important that the participant can in any case transfer the money to another fund

There are still risks: the law "On Non-State Pension Provision" has a "loophole" - the possibility of combining an asset management company and an administrator.

However, this danger is levelled by the custodian bank, which controls all NPF accounts. And must block all actions of the fund that do not comply with the declaration. In addition still the supervision of the Securities Commission, which monitors the state of the investment portfolio of funds on a daily basis. This means that, if necessary, it is possible to trace any step of the NPF.

... won't inflation "eat up" pension deposits?

There are many instruments to protect pension deposits from inflation.

These are insurance, index instruments, benchmarks. Do Ukraine have these instruments? Not at the moment.

- We can use such instruments as index securities linked to inflation, - comments Grigory Ovcharenko, - by and large we already have an opportunity to invest in any instrument outside Ukraine. And if we draw parallels between inflation and devaluation, what instruments, for example, shares, can provide protection against both, fulfilling several functions at the same time.

Different countries have different approaches to this issue.

For example, in Kazakhstan, in the Czech Republic, in Slovenia there are regular norms that the NPF rate income should not be lower than a certain benchmark. Accordingly, the manager tries to adjust, to invest exactly those instruments that are guaranteed to give a yield higher than this benchmark. As a result of comparing these strategies, in many cases instruments related to investments in the capital market give higher returns. So it depends on the mentality, on the phase of implementation of the pension reform.

- I think that at the first stage of launching the pension reform it is necessary to provide such a set of tools to minimise the risk," Ovcharenko summarises.

What criteria should a depositor use to choose an NPF?

When choosing a Fund, the following points are important:

• NPF should have a history and not too small fund (ideally - more than 10 million UAH)

• Before deciding to save pension money in this particular NPF, analyse its asset structure by profitability - for the entire period of activity. You should look for funds with average profitability and a long period of operation.

• In the investment sphere there is a directly proportional relationship between profitability and the degree of risk. The more profitability the investor seeks, the more he risks. That is, the most profitable funds enter the zone of the most risky investments.

How does this work in other countries?

In America, instead of the second, compulsory, level of pension accumulation, there is only the third optional level. But the country that has been following this path for many years.

Until the 1970s, America's stock market was available, conventionally speaking, to the rich and "advanced people." The launch of so-called IRAs (Individual Retirement Accounts - author) widened access and led to the fact that today 70 million American households have pension savings.

The Russian Federation has a different model of the NPF system. There, the funds function as a joint stock company. In addition, in the Russian Federation, the state has taken over most of the management of this capital. Where the state takes a dominant role in the use of these funds, we see models prone to corruption, inefficient use, or attempts to fill budget holes, including at the expense of these funds. The examples are very simple: Kazakhstan, Hungary, Russia.

The majority of European countries, which moved from socialism to capitalism, necessarily introduced a mandatory funded pension system.

An example for Ukraine is Poland. There the compulsory accumulation scheme worked, and now there is a gradual transition from the second level of pension accumulation to the Automatic Enrolment System (a programme for automatic registration in the pension system - auth.) Instead of compulsory accumulation there is a system of incentives.

It works like this: if you put up to 5% of your own money into the account, the fund will add the same amount to you. But the payments must be regular. This model has a good system of incentives, but here the depositor needs to be more financially active than in the NPF model and participate in the formation of his own pension.

The government is now considering two key pension models.

Thefirst one is a centralised second level of accumulation. Its essence is as follows: there is an accumulative centralised pension fund managed by 5-7 AMCs, and there is an administrator of this fund.

Thesecond is the launch of the second level through non-state pension funds. It is not yet known whether there will be existing NPFs or new ones. The system under this model will consist of 10-15 NPFs and 3-5 administrators.

Discussions are still underway as to which model will finally be implemented.

Three questions about the "ideal pension" for Grigory Ovcharenko:

the "best" time to contribute to an NPF

As soon as your labour experience starts, you get your first money, it is a good opportunity to start saving

"Ideal" pension system

There is no such thing as a perfect one. Why not, because countries have different demographic, cultural and social environments. But the presence of at least three elements of the pension system should be mandatory. Both solidarity and funded levels are necessary, with supporting infrastructural, socially motivating and fiscal elements.

Top 5 best pension funds by profitability, in your opinion

I don't want to praise myself, but it's a fact these are the three funds under our management: "Emeritus" (Ukrtelecom fund), Ukreximbank fund and "Dynasty" fund, as well as "Laurus" and Privatfond funds.

Alexandra Shchukina