Another angle of the pension system reform: how can the private pension system boost financial system development?

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Publishing date: Thursday, 30 March 2017
Views: 7260

The shocks of the bank fraud that hit public finances, and the need to sign a new funding agreement with the International Monetary Fund, have brought to the fore the need to reform the current pension system, or in such situation increasing deficit of the state social insurance budget and the mandatory health insurance funds cannot guarantee long-term sustainability of public finances. The draft reform was approved by the Parliament in late 2016 and provides for a new way of calculation and indexation of pensions, increasing the retirement age and the mandatory length of pensionable service, as well as elimination of a number of benefits for some insured categories. However, the reform provides neither incentives for development of the private pension system, nor any vision on the development of the multi-pillar system in the long term.

In this context, even if increased retirement age counterbalances for a period acceleration of population aging and reduction of the ratio between contributors and retirees, it will not be able to maintain sustainability of the pension system in the long term. Moreover, postponing some complex reforms and stimulating development of the private pension system (Pillar II and III) will increase the bill paid by economically active population, which involves significant opportunity costs. Experience of developed countries with an advanced social protection system shows that private administration of pensions had much better results than state administration of the same and quality of life of pensioners was closer than the active period. Moreover, development of Pillars I and II of the pension system led to correction of some structural imbalances in some economies, such as creation of investment resources with long maturity or saving tools that can manage excess liquidity and reduce the effect of negative interests.

For Moldova, even if public finances at the moment cannot counteract loss of a part of social insurance contributions (essential for stimulation of Pillar II), other actions may be taken into account in order to boost development of private pensions. Since 2012, Expert-Grup presented a comprehensive study on the need to reform the national pension system and the optimal way to do so. Also in 2015, the main deficiencies and constraints of the public pension system were analysed and a series of measures for intervention and policy recommendations to enhance sustainability and increase its efficiency were proposed. Thus, even if by the end of 2016 a number of amendments to pension legislation have been adopted, many of the previously prepared recommendations aimed at developing the multi-pillar pension system, still remain relevant:

  • Creation of Pillar II of pensions since 2020 - as referred to above, the state pension pursues providing a minimum subsistence income to persons in post-active life, and the income for a decent living is to be complemented by creation of Pillar II of privately managed pension. Upon reaching the retirement age the pension calculated on the basis of contributions paid and interest accrued from investing in financial instruments (basic principle of Pillar II) will complete the minimum state guaranteed pension. In this regard, we recommend implementing Pillar II of pensions progressively, since 2020, just after strengthening Pillar I. Thus, 0.5% of the contribution paid by employer and employee is to be annually re-transferred to a personal account of contributor until it reaches 3% paid by the employer and 3% paid by employee;
  • Improvement of the legal framework related to private pension funds - even though Moldova has a law governing private pension funds, and namely Pillar III, lack of required amendments to the Tax Code, the Civil Code or the State Social Insurance Budget Law inhibits for the time development thereof. In these circumstances, tax deduction of contributions payable to the private pension funds (Pillar III) and ensuring implementation of a set of fiscal incentives for non-state funds and beneficiaries, will boost development of this sub-segment of the domestic financial market.
  • Strengthening of the regulatory framework on activity of private pension funds. At the moment, there is no legal framework covering activity of Pillar II, and that one governing Pillar III (private pension funds activity) is obsolete. Therefore, a unified regulatory framework that will govern Pillar II and Pillar III of pensions needs to be defined. Besides the incentive aspects referred to above, the legislation shall ensure safety, efficiency and integrity of their management by funds.

This publication was produced under the ”Support for structural reforms in the banking, energy and state-owned enterprises sectors from Moldova”, funded by the British Embassy in Chisinau through the Good Governance Fund. The content of this publication is the sole responsibility of the author and does not necessarily reflect the views of the British Government.

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Tags: Natalia Chitii

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