Thursday, September 13 2012 12:50
Pension reform will bring feeling of well-being to Armenia
ArmInfo. A three-stage pension system will be introduced in Armenia in early 2014. It will include voluntary and compulsory accumulative pensions components. USAID Pension and Labor Market Reform Project (PALM) that has greatly assisted the Armenian Government in transition to the new system will be completed shortly. In an interview with ArmInfo Rosa Chiappe, Chief of Party for USAID/PALM, tells about the result of USAID/PALM and the new challenges Armenia should overcome in the way to introduction and establishment of the new pension system.
Ms. Chiappe, what are the results of the three-year project USAID/PALM? How useful were the visits of the experts who were invited in Armenia during implementation of the project?
Very important results for the Government of Armenia and USAID were achieved during implementation of the project. PALM established effective cooperation with the ministries of finance, labor and social affairs, the Central Bank of Armenia. As a result, a comprehensive legislative field of the new pension system was developed, which will allow diversifying the incomes of the pension age citizens. A pensioner will get an opportunity to receive pensions both from private and government pension funds.
Under USAID/PALM a personalized database on pensioners was created at the State Revenue Committee, the Government of Armenia. The project provided two models of actuarial expectation to the Government of Armenia.
During implementation of USAID/PALM in Armenia, the best international experts visited Armenia. With their support 47 regulatory acts of the new pension system were elaborated. The experts of the securities market helped the government stimulate creation of private pension funds. The visit by Jose Pinera, the former minister of labor and social security of Chile, one of the architects of accumulative pension systems, was a significant event. Jose Pinera has many friends in Armenia and he is very interested in a success of the pension reform in the country.
Consequently, USAID/PALM has managed to create bases of the pension system and bequeath the best ever pension system. In USAID they are sure that the new pension system of Armenia will ensure the welfare of Armenia, good incomes and living standards for senior citizens, as well as will create some assets that will be invested in economy of Armenia.
It is noteworthy that the accumulated pensions will be invested in economy of the country becoming a precondition for new jobs. We had an opportunity to see how it works in Chile, Columbia and many other countries.
Is there any relation between issue of securities by private companies and the accumulative pension system?
Pension funds purchase corporate bonds. Privates are members of pension funds and savings of individuals are invested in corporate bonds. That is why CalPERS - California Public Employees' Retirement System has assets in the amounts of trillions of dollars.
Such funds exert pressure on emitter-companies in order they apply proper management schemes.
What will be the optimal quantity and aggregate volume of pension contributions to the Armenian pension funds?
I think that 2-3 pension funds are optimal for Armenia. It will be enough to ensure normal salary for the staff of these funds. It should be taken into account that in the first year (2014) of the compulsory accumulative pension system in Armenia, the aggregate volume of pension contributions to the funds will made up some $100-$150 million. It is a not big amount as compared to the pension funds of other developing countries. The point is that there is small number of legal employees in Armenia and they receive low salaries.
What challenges may trip up the compulsory accumulative system after introduction in 2014?
It is very important for the population to be well informed of the system. If the population does not trust in the system, the reform will not be a success.
Second, the Central Bank of Armenia must be well prepared for regulation of relations in the pension system. I am sure that the Central Bank is ready for the start of the system and will properly fulfill its functions of the mega regulator.
Third, the securities market should be prepared for the work on the new pension system, i.e. "to digest" a big volume of pension contributions.
In addition, the shareholders of the companies that will be managing assets of the pensions funs should have good business history. Their activity at the managing companies will be toughly controlled by the Central Bank. Their access to management of assets of the pension funds will require as tough procedures as licensing of banks.
Do you think it possible for that the government to participate in the managing companies?
No, the government cannot have such specialization. It requires involvement of experts. For instance, in Ireland where the state pension system reserve totaled $1 billion, the managing companies are selected through contests in order to prevent corruption in the sphere.
What risks may emerge from the equity market, which is considered insufficiently developed?
It is like the chicken and egg situation. The securities market will start taking shape with the first contributions to the pension funds.
As regards insurance companies managing pension assets when making annuity contracts, they must offer products new in the market. USAID/PALM has developed a relevant conception, which will be submitted to the Government. Actually, formation of annuities institute by insurance companies will continue until pension contributions are accumulated in the pension funds and pensioners get an opportunity to transfer the accumulated funds to insurance companies.
Development of annuities institute will depend also on the securities market and issue of government long-term bonds. Application of annuities may become compulsory to pensioners who will accumulate significant funds on their personal accounts.
Another important condition is expansion of the securities market that should secure fulfillment of life insurance liabilities. Transition to the stage of annuities will take insurance companies quite long and it is necessary to think of that already today.
Who and how will continue the work launched by USAID/PALM?
USAID will start implementing three new projects not to leave the Government of Armenia alone at the final stage of development and introduction of pension reform. Unlike USAID/PALM that was focused on the pension and labor market reform, one of the future USAID projects in Armenia will be aimed at personalized registration of pensioners at the State Revenue Committee, the Government of Armenia. Another program of economic and financial development will contribute to formation of voluntary and compulsory pension systems, security market, development of insurance market and rising of public awareness of pension reforms. The third program will be aimed at pension reform i.e. assist in policy development, pension reform options, development of relevant skills and knowledge, creation of information technologies instruments for integrated social services. This program will also contain a public awareness of pension reforms component.
To conduct public awareness raising campaign, the Ministry of Labor and Social Affairs has provided a grant to a special fund. Assistance from other donors is expected as well.
Thank you for an interesting interview!
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