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Ukraine is transitioning to a three pillar pension system: - the first being a solidarity pension based on years of contributory service and the wage from which contributions have been paid over the working life;
- the second a mandatory accumulation system based on the investment of a portion of the pension contributions credited on individual accumulation pension accounts of the insured persons;
- and the third a system of supplementary, voluntary pensions with contributions made by employers and/or individuals.
However, the actual operation of the accumulation system (Pillar II) is yet to begin.
The primary task for the FINREP project is to assist the Government to successfully launch Pillar II. This will involve commenting on the legislation and providing advice on the model to be used, which contributors will participate, and the rate at which contribution will be made. The introduction of a funded Pillar II raises many issues for the Government as a portion of pension contributions will be directed to Pillar II, that in turn will reduce the amount of money available to pay today’s pensioners in the solidarity system. FINREP will help the government to address possible mechanisms for paying this transition cost and work with it on ways to minimize the impact of a reduced cash-flow into Pillar I.FINREP will also help the Government with the implementation of Pillar II. There are a whole range of tasks here including educating the Trustee of the Pillar II fund, selecting an investment strategy, choosing the service providers, and putting into place within the Pension Fund of Ukraine new business and administrative processes.
Potentially 8 million people under the age of 35 (inclusive) could enter into Pillar II, and most of them have little understanding of accumulation type pension systems. FINREP will assist the Government to develop education and public outreach programs so that participants understand what Pillar II is all about and how it works.
Accumulation systems need to be invested in appropriate assets, and many of the asset classes needed for the successful operation of the accumulation system are poorly developed in Ukraine. FINREP will work with the Government, the State Commission for Regulation of Financial Services Markets of Ukraine (FSR), the Securities and Stock Market State Commission (SSMSC) and the market to maximize the ability of the contributions from Pillar II to be invested in the best interests of participants but at the same time facilitating sustained economic growth in Ukraine. A strong regulatory system will be needed to protect the assets of Pillar II participants so FINREP will work with SSMSC and FSR to ensure they are fully ready to create such a regulatory system to assure the protection of participants’ contributions and interests as much as possible.
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