Experts Explain Low Interest of Funded Pensions in Belarus

What is wrong with the proposal made by the Belarusian authorities.

Workers will have a new mechanism for voluntary funded pension. It is envisaged in the draft presidential decree, which was considered at a meeting with the head of state and generally approved. Minister of Labor and Social Protection Irina Kostevich told this to the press, as the state agency BelTA reports, telegraf.by.

"To think about their new standard of living"

People in Belarus mainly use the solidarity pension system. However, some take part in programmes of voluntary funded pension.

"But it has not developed as well as in other countries as an additional component in the pension system. Only about 5% of those employed in the economy have accepted the voluntary funded pension," she said. As a rule, people do not initiate participation in the voluntary funded pension.

Irina Kostevich says the solidarity pension system remains in the country. According to it, about 15 billion rubles will cover pensions this year alone. The state retains the guarantees of pensions. In September, the average retirement pension is 545 rubles.

"Our task is for every citizen to rely not only on state support in the form of the state retirement pension, which we pay in full in due time, as required by law. Everyone should be interested in improving their standard of living and quality of life in old age. Therefore, a new mechanism of voluntary funded pension is proposed", the Minister explained.

Employees will be offered to pay an additional contribution (in addition to the mandatory contribution of 1% of salary at present) for funded pension in the amount of up to 10% of their earnings. Everyone will be free to choose the precise amount, but it cannot exceed 10%. At the same time, the employer will be obliged to make an additional contribution proportional to the employees' contributions. If a person chooses to contribute 1%, 2% or 3%, the employer adds the same percentage. If one chooses 4% or more (but not more than 10%), the employer still adds 3%.

This will not increase the burden on employers. They will pay the interest to employees from the funds for the compulsory contribution to the NSSF, which is 28%. For example, 3% will go to the employee's funded pension and 25% to the NSSF.

A draft decree with all these norms was supported at the level of the head of state. "I think it will be signed in the near future", said Irina Kostevich.

The Ministry of Labour called the new opportunities an additional financial bonus, an impetus to spur the development of voluntary funded pension. In this case, a person retains all the pension guarantees from the state.

"There are no losses for a person, but only pluses. By joining the voluntary funded pension system, one forms additional income for old age", said the Minister.

Journalists wonder how funds of the funded pension system will be protected from devaluation. Irina Kostevich admits certain risks exist. Therefore, the Ministry of Labour does not expect that all employees will take advantage of the idea.

"We see that likely the people who have about ten years left until their pension will be interested. That is, those who already have benchmarks, and understanding that in a certain short period one needs to think about one's new standard of living," she said.

The minister stresses that the funded pension will be inherited and capitalized, i.e. the money will not just be accumulated, but work for the economy and be invested in investment projects with high returns.

However, experts say the funded pension system will be poorly developed.

"A matter of trust"

According to Vadim Iosub, senior analyst at Alpari Eurasia, there are two main problems.

"The first is the matter of trust. The banking shows how trust in Belarusian financial institutions works. Foreign currency deposits have been decreasing for almost two years, whereas ruble time deposits are slightly increasing, but not at the expense of the fact that people bring money to banks, but at the expense of the interest accrued. I think that absence of the interest could demonstrate an outflow of money from the ruble savings. At the same time, inflation and devaluation expectations are traditionally high. Especially in the long run. That is, very few people will consider that the money deposited in Belarusian rubles for 10-20 years or more will not be subject to inflation and devaluation. I guess that given the current attitude of the population to financial institutions and future economic stability there will be few people willing to save pensions," the expert believes.

The second reason, in his opinion, is the poorly developed securities market.

"When pension funds collect money, they invest it to keep it from depreciating caused by inflation. There is no problem with it in developed countries. There is a huge market for reliable bonds. There is a huge market of shares of successful reliable companies with a good history. There is no problem there where to invest pension money. In our country, the stock market is rather dead than alive; the stock market is represented by completely incomprehensible companies. There is no volume of shares to invest money in. As for bonds, there was a story about a bond default. That is, even if pension money could be raised, it is unclear where one could invest it in the next few decades. Given the current state of the country's economy and the attitude of the population to the economy, it's unlikely that the attempt will be fruitful," the senior analyst says.

When asked whether he would use the funded pension system, he replied, "No. For the very reasons mentioned above. I don't where a pension fund can invest my money and why it can do it better than I do."

"It's all about inflation"

According to Prof. Zhanna Kazimirovna Tarasevich, director of the Business Union of Entrepreneurs and Employers named after Prof. Kuniavski, the funded pension system component may be present in the pension reform.

"But there are two important aspects. The issue is whether the burden on employers will increase or not. The minister assures the burden remains the same, but the burden on the employee increases. Because instead of the current 1%, one will pay up to 10%. One can assume that if a young or middle-aged person is thinking about the differentiation of one's future pension, this option will be of interest. Especially for those with salaries higher than the average in the country. As for the low-paid population, withdrawing a certain percentage without an increase in wages would be unattractive. Thus, one cannot assert the number of employees who voluntarily accumulate pensions tomorrow or the day after the introduction of the decree will grow. However, if one conducts a correct explanatory policy, if one work with employers, to include something in the social package, then, this norm can potentially play a positive role in the long run," said the Director of the Belarusian Social Security Fund.

In her view, there is another point, which is alarming at the moment in terms of funded pension.

" The inflation rate has started to increase. One should consider how preservation will be ensured to keep these resources from depreciating. The regular pension formula remains, plus there is a new supplementary formula. It's progress. I guess the additional pension should also be inherited. That is, now when a person dies before retirement age, his or her pension contributions are not inherited. The funded part proposes inheritance. If the decree preserves it, it will become a motivation to make such savings. But, again, everything depends on inflation," concluded Zhanna Tarasevich.