The Legal and Practical Aspects of the Pension Reform in Ukraine

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Abstract: Today the pension reform is a very relevant issue. Special attention is given to the formation of the system of pensions. Ukraine has proposed to apply the funded pension system. The author of this scientific article analyzes the main provisions of the pension reform and identifies the problematic aspects of its implementation.

Key words: pension reform, solidarity, system of pension provision, funded pension system, the Pension Fund of Ukraine, pension contributions, insurance premiums.

Ukraine implements the policy of European integration that provides reforms in most sectors of the economy and the implementation of institutional and structural rearrangements. Particular attention is paid to the area of ​​pensions, which, according to the meaning of many scholars and experts, needs change. The first attempt of pension reform in Ukraine took place in 2011, when the Law of Ukraine “About Measures of Legislative Support for Reformation of the Pension System” (08.07.2011) was accepted. The Verkhovna Rada of Ukraine also took additional 22 acts, which are relevant to the area of pension system. To implement the new pension system in Ukraine such measures were taken: increase of the retirement age and length of service, introduction of a funded pension system, establishment of private pension funds, reduction of the pensions of civil servants. However, due to political and economic processes taking place in Ukraine, the reform has not been implemented. A great deal of pension standard legislation has been repeatedly modified, and some laws were unconstitutional. In fact, the only position of increase of the retirement age to 60 for men and women remained relevant. By the way, this position raised many questions among population and the civil servants, because of the complicated mechanism of pension calculation.

When society got used to this change in pension legislation, in 2015-2016 the reform process resumed. Firstly, the Law of Ukraine “About Amendments to Certain Legislative Acts of Ukraine on Pensions” (03.02.2015) was adopted, which introduced the first stage of pension reform. Secondly, starting with 01.01.2016 the following acts entered into force: Law of Ukraine ” About Amendments to the Tax Code of Ukraine and Laws of Ukraine to Ensure the Balance of Revenue in 2016″ (24.12.2015, number 909) and the Law of Ukraine” About Amendments to Certain Legislative Acts of Ukraine” (24.12.2015, number 911). These acts regulate pension issues specifically in 2016. The Cabinet of Ministers of Ukraine and the Verkhovna Rada of Ukraine noted that the state needs a pension reform appealing to the fact that Ukrainian society has long been ready for the European model of pensions, which offers for citizens to accumulate their own funds for their financial support in an old age. An important argument was the fact that the pension fund has huge debts to the state budget and can not get out of this situation and solve economic problems for a long time. Its economic reform is inefficient.

Despite the fact that the first stage of the pension reform has already been implemented, the prerequisites for the pension reform, its content, economic and legal aspects of its implementation, and, what is the most important, the risks associated with its use in Ukraine and the possible consequences, are not sufficiently researched. This issue is raised at the level of journalist publications and evaluated in oral statements of officials, but there is a lack of scientific research. As a result, there is a special need in conducting the research, which aims to make a broad analysis of the legal and practical aspects of the pension reform in Ukraine. In order to achieve the planned goals the following tasks need to be fulfilled: 1) to study the conditions for the pension reform; 2) to characterize the main points of the pension reform (special attention should be paid to the issue of a funded pension system); 3) to identify the main issues related to the introduction of the new pension system.

The solidary pension system has been used in Ukraine for a long time, which provides pensions to the people who are entitled to receive pension in amount which is defined for a person depending on the length of service and salary, from contributions made by working citizens. This means that, through the Pension Fund of Ukraine, which performs calculations and transfers of funds, the younger generation of employees holds public financial retirees. This pension system is not used by most European countries because of its inefficiency. The solidarity system does not motivate people to work more efficiently. The person realizes that he pays contributions to finance payments to pensioners, who are in the state now. He does not earn for himself. In this regard, the activity and desire of an employee to work significantly reduces. The basic problem is that the application of the solidarity system could threaten the economic well-being of the population. The countries, which have a constant economic crisis, are not ready for implementation of the new pension system. The lack of enterprises of the small and medium business, permanent reduction in the enterprises destabilize situation in the country. As a result, citizens massively become unemployed and do not make contributions to the Pension Fund of Ukraine. In such a case the Fund loses the financial opportunity to pay pensions and needs to carry out unplanned budget expenditures, which negatively affect the general state economic system. Since the problem of unemployment in Ukraine remains urgent for a long time, the Fund often receives less amount required to make payments of pensions. There is also another problem in Ukraine, which makes quite a negative impact on the functioning of the solidarity pension system. It is illegal employment. The great deal of the working population in Ukraine does not make pension contributions to the Fund, because they work without official registration. Besides, many workers pay contributions to the Fund in the reduced amount, because they officially (according to the staff) get the minimum amount of salary, but actually get much higher wages (the so-called “envelope salaries”). The above mentioned circumstances, and the fact that the Pension Fund has a huge amount of debt to the state budget, form the main range of conditions for the pension reform. Additionally, it should be said that Ukraine has chosen a pro-European direction of the state, which provides for reform in the country and puts living standards in compliance with the standards that exist in Europe. That also stimulates the implementation of reforms in Ukraine, especially in pension sphere. We should also note that implementation of the pension reform in Ukraine is very important for the state from the economic side, because the requirements for the pension reform in Ukraine are included in the list of requirements of IMF for Ukraine. If state wants to get a loan of $17.5 billion, it must fulfill the requirements of the lender. Based on this fact, the reform process in the pension field must be accelerated.

To analyze the basic position of the pension reform in Ukraine, it is necessary to determine the content of the Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine on Pensions” (02.03.2015) (Hereinafter – the Law). The areas of continued reforms are outlined in the bill №2767 of the Government. The Cabinet of Ministers of Ukraine with the help of the Ministry of Social Policy developed the Pension Fund and NGOs prepared act.
The Law provides the following elements of the pension reform: 1) the abolition of “special” pensions; 2) the part of the governmental costs of PAYG pension should be entrusted to the state; 3) the improvement of the mechanism of pensions of the people who receive them abroad; 4) the implementation of the first phase of the funded pension system. The first three elements have already been implemented, and the fourth one is still to be implemented. So let us move to the direct analysis of the most important aspects of the pension reform.
The abolition of “special pensions”, which previously were paid for such categories of people as: the military, the deputies of Ukraine, state officials, judges, prosecutors, local authorities, academicians, means setting the common principles of calculation of pension benefits for all categories of citizens. This means that, regardless of the nature of work and the post occupied, the pensions for everyone will be paid in a manner prescribed by the Law of Ukraine “About Compulsory State Pension Insurance” and depend solely on the duration of insurance and the earnings. This procedure will prevent social injustice, when a person who has worked for 50 years receives the minimum wage, and the deputy of Ukraine, who represents the social interests in the Supreme Council of Ukraine for only one term, receives in ten times higher pension.

The law specifies a number of issues relating to special pensions, and provides that it does not apply to military personnel and the persons who, at the time of the Law implementation, were considered as retired on special order. For such categories of people the payments will be made in a pre-determined amount, but this sum will not be indexed and recalculated for as long as it beats with amount of pension that, calculated according to the new norms. In addition, the law provides that a person who, at the time of the Law implementation, will have 10 and more years of special experience, gets the right for financial compensation. The legislator passed such rule, because the special workers paid contributions to the pension fund in a larger size (2.5% more) than other working citizens for a long time.

The most important problems of the modern pension reform in Ukraine apply to the introduction of the funded pension system in the country. The introduction of the new system in the state provides a long-term restructuring. Therefore, lawmakers should develop a detailed plan of the reformation process. The introduction of the new system is supposed to be made in three phases: 1) improvement of the solidarity system, 2) implementation of a mandatory funded system, 3) introduction of a voluntary private pension savings system. The new system differs from solidarity because it stipulates that everyone will form their own future retirement. The pension will depend on the amount of contribution, made by the person during the entire period of her / his professional activities. It is stipulated that the principle “as much you contribute, so much you get in the future” will stimulates the activity of the population in terms of employment. People will lose the possibility to use the mechanism of guaranteed minimum pensions, which the state gave them before. Moreover, the legislator expects that the pension reform will help legalize labor relations with employees, because only in this situation a person gets an opportunity to contribute and form his / her pension. This situation will positively affect the economy of the state, because the official employment in Ukraine helps the tax system work effectively. Many people, who do not pay this type of tax now, will pay tax on personal income.

As it has already been mentioned, the introduction of a funded pension system is still to be implemented. The Government offers to the Verkhovna Rada of Ukraine to adopt the Bill №2767 (further named in the article – the Bill). There are reasonable grounds to believe that in the near future it will be approved. Considering this, it is necessary to analyse the provisions of this Bill. Therefore, it provides for the introduction in 2016 of the first, and in 2017 – the second level funded system. Initially, the Cabinet of Ministers of Ukraine offers to establish the first plan of program of the funded pension system in 2016 and to apply a new system for the following categories of employees: 1) persons 35 years old and up who work in jobs with especially hazardous and harmful, especially heavy and difficult working conditions (the list of number 1 and number 2); 2) persons, who are in the positions that are entitled to a pension for retirement; 3) persons who are civil servants, local government officials, tax officials, customs officers, prosecutors, judges, researchers and teachers regardless of their age. In 2017 it is planned to expand the circle of participants who will get pensions under a new program.

Accordingly, it is proposed to apply the new system to the people who at present are not older than 35 years. Additionally, the Government proposes to all interested employees, who are not older than 55 years, to move to a new system. Participation in the funded pension system provides for raising the premiums and the simultaneous reduction of contributions to the Pension Fund of Ukraine. It is planned that the size of the premium in the first year will be 2% per year and it will increase by one percent every year and reach 7%. It should be noted that the Bill, in addition to practical aspects of the program realisation, provides important economic aspects. It is noted that the state will serve as a guarantor of the preservation of finances in a funded system. To achieve this, a new body – the Pension Accumulation Fund – is planned to be created, which will be formed by the government and will control the process of administration of premiums. This fund will involve, on a competitive basis, the management companies. The Fund will monitor their activities through the work of the Fund Council and the responsible public authorities.

The conducted analysis gives a clear understanding of the content of the pension reform, its practical aspects of implementation, and gives an opportunity to determine the problematic aspects of innovations, most of which relate to the introduction of funded pensions. The main problem is that the new pension system, which in its content is expedient and perspective, can not be fully implemented in modern Ukraine, because neither the society nor the state is not ready for it. Due to the existence of political, economic and other factors, many citizens do not trust the authorities of Ukraine. Moreover, a significant part of society is on the threshold of poverty. It is clear that society in Ukraine does not fully understand and welcome the pension reform, that is why they will not support its implementation. It also must be noted that, due to an inherited from the times of USSR socialist character of thinking that the state should “take care of its citizens,” the introduction of the principle that “everyone earns for him / her by himself / herself” in Ukraine can not be quickly perceived by the society. That is why it negatively affects the dynamics of the reform.

It is necessary to talk about the financial risks associated with the implementation of the pension reform, because Ukrainian economy is in the state of protracted crisis that does not allow to provide such financial manipulation in the state. The high level of inflation forms the risk that funds set aside by a person may depreciate in a few years. In this situation a person will lose financial foundation in the old age. The negative fact is that the Ukrainians, who do not work officially, do not conduct official insurance premiums. This gives rise to the high level of shadow economy in the state and does not allow Ukrainian economy to develop. The introduction of the pension reform cannot quickly change the established for many years system of informal employment, which significantly reduces the positive effects of the reform.

Moreover, the stock market is not fully developed in Ukraine, that is why there is a reasonable risk that financial transactions with personal funds will be ineffective, not profitable. It is possible that this money can be lost. Such situation often occurs in Ukraine: the financial entity, which received the status of entity, which can conduct payment of pensions and other social payments, works for only one or two weeks and closes. According to the legislation, the temporary administration, which returns a limited amount invested in company funds, is created. Another problematic issue relates to the fact that the Bill offers the formation of a new body – the Accumulation Fund, but does not specify the scope of its authority and functional issues related to its activities. The question of what sources will be used to finance the creation of this body and the feasibility of its formation remains open.
The combination of these problems shows that today in Ukraine there is a lack of economic, ideological and theoretical basis for the pension reform. It is important to take into account that economic system of Ukraine is not perfect in respect of implementation of innovations. If the state neutralizes these issues, there will be the risk that the funds, accrued by employees during the years of accumulation system functioning, will be lost. This situation will lead to the formation of the negative image of the pension system, where people will not see any positive characteristics and will not support its implementation.
Summarizing the above mentioned information, it should be noted that Ukraine really needs the pension reform, but the implementation of the innovation should be made taking into account complex circumstances prevailing in the country. The financial risks, which do not allow to reform pension system successfully today, are also worth considering. The successful implementation of the funded pension system can be carried out only if the economic situation is stabilized, the financial markets are normalised and inflation is minimised in Ukraine.

Literature:
1. Measures ensure the legislative reform pension system 08.07.2011 p.: Law of Ukraine // Supreme Council of Ukraine. – 2012. – № 12-13. – Article 82.
1. About amendments to some legislative acts of Ukraine on pensions: The Law of Ukraine of 03.02.2015 p. // Supreme Council of Ukraine. – 2015. – № 22. – Article 145.
2. About amendments to some legislative acts of Ukraine: Law of Ukraine dated 24.12.2015 // Supreme Council of Ukraine. – 2016. – № 5. – Article 50.
3. About amendments to the Tax Code of Ukraine and laws of Ukraine to ensure the balance of revenue in the 2016 Law of Ukraine dated 12.24.2015 // Supreme Council of Ukraine. – 2016. – № 5. – Article 47.
4. About Amendments to Certain Legislative Acts of Ukraine on introduction of a funded system of compulsory state pension insurance and common principles of calculating pensions project, bill of 30/04/2015 p. 2767 number / [electronic resource]. – Access: http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=55000.
5. The pension reform // Government portal / [electronic resource]. – Access: http://www.kmu.gov.ua/.

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