Pension System of Ukraine

Ukraine's pension system, which operates today, is based on solidarity of generations, when the current generation of employees finances the pensions of citizens, who have already finished their career. It means that contributions to the pension fund of Ukraine are fully used to be payed to the current retirees. Thus, in the conditions of aging of population, changes the correlation of capable of working and pensioners. As a result total withholdings in the pension fund of Ukraine becomes not enough for maintenance of the proper level of pensions. Such pension system does not meet the needs in long-term resources, both financial institutions and the economy of Ukraine in general. With the adoption of the Law of Ukraine "On Compulsory State Pension Insurance" and "On private pension provision" in 2004 the gradual implementation of pension reform was initiated. The essence of which is in passing to the three-level pension system that practically is an international standard and shows the efficiency in many developed countries of the world:

FIRST LEVEL — a joint system of compulsory state pension insurance in which all costs that are transferred by enterprises and insured persons to the Pension Fund of Ukraine, are immediately paid to the current retirees. In comparison with the second and third level, joint system has several disadvantages:

The lack of individual retirement accounts. Personification involves only accounting of worker’s and employer’s contributions to the pension fund, but does not allow the pensioner to pretend for a pension in an amount adequate to the amount of his pension contributions.

The lack of choice of individual schemes of pension contributions. The only scheme of pension contributions and receiving of pension benefits is approved by legislation and can not be changed.

Inefficient use of the received pension contributions by the State Pension Fund. The funds are not invested in profitable financial instruments, as a problem of the general aging of population, forces to the immediate redirection of the funds on current payments to the present pensioners.

Lack of inheritance of the pension savings. In case of death of the payer, payments that were enumerated to him on the draught of all labor activity will be redistributed in behalf on payments to the present pensioners.

Insecurity of the state pension from inflation and devaluation of the Ukrainian currency against major world currencies.

 

SECOND LEVEL — accumulation system of compulsory state pension insurance. The essence of this system is that part of the contributions to the Pension Fund of Ukraine (7% of the employee's salary) will be sent to the State Accumulative Pension Fund of Ukraine. Unlike the solidarity system, contributions to the fund will be personified and will be credited to the individual pension accounts of citizens. Funds of the Accumulation Fund will be invested in the economy of Ukraine in order to protect them from inflation and to obtain an investment income. It is assumed that Accumulation System will be implemented in 2012.

THIRD LEVEL — private pension system. The essence of the system is to build additional retirement savings by voluntary contributions from individuals and employers. The basis of private pension system are non-state pension funds (NPF) - legal entities established under the Law of Ukraine "On private pension provision", which have the status of non-profit organizations (non profit companies), operate and carry out activities solely to the accumulation of pension contributions in favor of the participants the pension fund. Participants of NPF - are individuals in favor of whom pension contributions are paid to this NPF and investors - are those who make such contributions (participants themselves, their employers, professional association or family members). Pension accumulations of NPF participants are formed by pension contributions paid by the member, his employer or family members, and investment income derived from investment of funds. All funds that are registered on individual pension accounts of the participants (pension contributions and investment income), are the property of NPF participants independently on who has payed the fees - the participant, his employer or relatives. Therefore no one else, except the participant may not dispose of these funds. Thus, the system of private pensions is based and operates on principles other than the state pension system, which gives it a number of significant advantages:

 

  • Your participation in the private pension system is voluntary.
  • Non-governmental pension does not deprive you from the right of a state pension and does not depend on seniority and salary.
  • Paid pension accumulations and received investment income are registered on individual pension accounts of the participants , which ensures their right (or the right of their heirs) to receive accumulated amounts in full size.
  • A participant has the right to choose the size and frequency of pension contributions and benefits. The amount of non-state pension is not limited by legislation.
  • A participant has the right to set retirement age (it may be less than the established state pension age to 10 years, that is: for men - at least 50 years and for women - at least 45 years).
  • Pension funds may be inherited by person (s), who is the heir of the owner of such funds and paid only once within five working days of receipt of the relevant application and necessary documents. In order to increase investment income and the size of pension payments pension funds are invested in profitable financial instruments.
  • In order to increase investment income and the size of pension payments pension funds are invested in profitable financial instruments.
  • Pension contributions are not imposed to the tax on personal income, the amount of paid pension contributions may be included to the tax credit.
  • NPF participants have the right to obtain information about their pension accounts granted throughout the action of the pension contract.
  • NPF participant has the right to transfer pension savings to another NPF, insurance company or bank retirement savings account.
  • NPF participant maysuspend making pension contributions or terminate the pension contract, herewith already accumulated pension funds will remain his property and will be paid in case of reaching the retirement age.
  • NPF participant is entitled to receive a one-time pension payment in case of a critical state of health, disability or departure for permanent residence outside Ukraine.
  • Participation in the NPF provides pension provision in Ukraine for individuals, who are working abroad.
  • The current legislation of Ukraine has established a system of strict multilevel cross-check of the NPF activity.

 

The principles of the NPF activity

 

Not-state pension funds (NPF) are established by a decision of the founders without the goals of gaining profit, for further distribution among the founders. Sole activity of the NPF is private pension provision, and realization of other activity unprivided by the Law of Ukraine "On private pension provision" by pension fund is prohibited.

 

NPF acts according to the Statute, approved by founders of the fund and registered by the State Commission for Regulation of Financial Services Markets of Ukraine. An integral part of the Statute of NPF is a Pension scheme - a document that specifies the conditions and procedure of private pension provision of the participants of the fund. NPF may have several pension schemes.

 

The only organ of management of pension fund is the Board of Foundation, that carries out control after current activity of pension fund and decides the basic questions of its work. The Board is formed in an amount not less than five persons who meet the qualification requirements set by the State Commission for Regulation of Financial Services Markets of Ukraine and requirements set by the Law of Ukraine "On private pension provision."

 

To ensure the activity of the pension fund The Board is obliged to conclude contracts with:

 

  • Pension Fund Administrator (legal entity, that is licensed by the State Commission for Regulation of Financial Services Markets of Ukraine and engaged in accounting depositors and participants, opening and maintaining personal accounts of participants, financial and tax accounting of NPF and formation of reports of NPF);
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  • Asset Management Company (AMC) (a legal entity that has the appropriate license of the State Commission on Securities and Stock Market, invests pension funds in order to preserve them from inflation and getting investment income for participants);
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  • Pension Fund Custodian (bank, that is licensed by the State Commission on Securities and Stock Market and engaged in opening and maintaining accounts of NPF, keeping its assets).

 

SCHEME OF FUNCTIONING OF NPF

 


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