Authorities Decide On Dubious Innovation For Belarusian Pensioners

• 12.06.2022, 9:58

On October 1, another so-called pension reform will start in Belarus.

We are talking about innovations regarding additional funded pensions. In short, workers will be able to voluntarily pay insurance premiums of up to 10% of their paychecks. Employers will transfer up to 3% to this account. Now officials are talking about the October changes at enterprises. However, this innovation raises many questions both among the workers themselves, as well as among experts and even the Ministry of Labor. This government department has previously expressed scepticism about the reform of the funded pension system. One of the main questions is where to get the “extra” money for the funded pension, when salaries and real incomes are falling, and prices are rising noticeably, zerkalo.io writes.

Briefly, about the essence of the October changes

From October 1, employees will be able to voluntarily pay insurance premiums of up to 10% of their paychecks. In this case, employers will be required to transfer up to 3% to this account. However, there is a detail: the employer must transfer the same percentage as the employee, but not more than 3%. For example, if a company specialist decides to contribute 2% of a paycheck to an additional pension, then the employer must add the same amount. If the employee chooses a tariff of 5%, then the employer will “put” no more than 3%.

Can everyone use the funded pension?

This opportunity is available to employees for whom their employers pay mandatory contributions to the budget of the Social Security Fund.

There are also age restrictions on funded pensions. You can join the new program no later than three years before reaching the generally established retirement age. That is, men will be able to apply for an additional funded pension up to 60 years, and women up to 55 years.

When can you receive the accumulated money?

These funds will be available at your choice within 5 or 10 years. But this can be done only after reaching the generally established retirement age. Today it is 63 years for men, and 58 years for women.

Is it possible to inherit such a pension?

The Ministry of Labor reports "funded pension provides for the possibility of inheritance".

But earlier, the Minister of Labor Iryna Kastevich, speaking about the inheritance of such a pension, made a reservation — "if it's very important".

Through which companies will funded pensions be carried out?

Voluntary insurance of the additional funded pension will be carried out through the Stravita company.

“Employees who wish to apply for an additional funded pension will be able to do it from October 1 and conclude an agreement directly with the insurer or online through the official website of the insurer,” the Ministry of Labor specifies. “Additional contributions to the funded pension to the account of the Republican Unitary Insurance Company Stravita will be transferred monthly by the employer at the request of the employee.”

What benefits are provided for those who apply for an additional pension?

“In connection with the payment of contributions to an additional funded pension, an employee is provided with an income tax exemption,” the Ministry of Labor explains.

Some Belarusians have already registered insurance for an additional pension. What awaits them after October 1?

Officials plan that the pension contracts that Belarusians have already concluded with insurance companies through employers or on their own will be preserved. It means that it is still available for contribution. True, about 5% of employees use this option. The Ministry of Finance, among the reasons why Belarusians are in no hurry to take out such insurance, previously called the fact that "a series of devaluations undermined confidence in financial instruments". How Belarusians can be optimistic and trust now is an open question.

Who really bears the burden of payments for employees? Will employers receive compensation for the payment of funded pensions?

With regard to mandatory insurance contributions: now the deductions per employee for most employers are 34% (6% of the wage fund goes to various benefits, 28% to pension insurance). All insured employees pay 1% of their paycheck.

Now officials are talking about the phased introduction of the funded pension system. In the first phase, they want to divide the additional expenses for the “second” pension between employees and employers but cut the mandatory contributions for employers.

“The employer's total contribution to social (pension) insurance does not increase. The rate of the mandatory 28% insurance premium for pension insurance will be proportionally reduced for employers,” the Ministry of Labor says.

Then the question arises of who will compensate for the costs of the budget. In this situation, there is a risk that employees or employers (or both) will have to bear the costs of replenishing this missing part of the budget at subsequent stages of the introduction of the funded pension system.

As for employees, they will independently bear the costs of paying contributions for the funded pension, which will be launched from October 1. This is where some experts see the weak point of the innovation: the question remains where to get the “extra” money for a funded pension when wages and real incomes are falling and prices are rising noticeably. It may not be an incentive for all employees that another part of the employer will be added to these voluntary contributions, for whom this will be mandatory.

Why did the Ministry of Labor criticize the innovation earlier?

The Ministry of Labor was pessimistic about the reform of the funded pension system, which will be introduced from October 1, 2022. At the same time, the main question was just about who will compensate for the "lost" mandatory insurance premiums. Employers are expected to contribute to the funded pension.

“If we introduce mandatory savings, we will have to think about introducing an additional tariff,” Deputy Minister of Labor and Social Protection Valery Kavalkou explained earlier. "Today, the Social Protection Fund is already forced to attract funds from the republican budget to ensure current payments. This 29% does not cover the cost of pension contributions today, so they cannot be taken to cover savings. Someone will have to compensate for this money, and the only option is to cover it with the republican budget. Employers will be extremely against an increase in the additional insurance rate, they already perceive these 28% negatively. Employees are not yet ready for this.”

There is a "hole" in the budget of the Social Insurance Fund. The budget covers pension payments and benefits. The budget deficit has existed for several years and requires annual injections - subventions from the state budget." Aliaksandr Lukashenka said this earlier. The Ministry of Labour and other relevant state institutions are not able to solve this problem.

What other problems could there be with this innovation?

Many people have a question about where they will invest funds that will be transferred to an additional funded pension in order to prevent them from being cut down by inflation rates. The second question is: at what percentage will the funds be placed, will it vary, for example, depending on the amount of deductions or other factors.

The Ministry of Labor previously stated that they analyzed the Russian experience, where they introduced the funded part of the pension, but since 2014, they have been regularly freezing these savings and transferring them to the pension fund.

“Unfortunately, the crisis of 2015-2016 showed that it is very difficult to save this money and, most importantly, increase it in order to maintain purchasing power,” Valery Kavalkou noted earlier. "Russia was faced with the fact that the pension fund received a negative return, and after that, the accumulation was a little frozen. I think that we can talk about the introduction of mandatory accumulation only when we definitely feel the stabilization of the economy.”

In this situation, the question remains whether now is the right time, when the country is faced with large-scale sanctions, difficulties with exports and other problems, to introduce such an innovation in the form that officials intend to do. Neither the Ministry of Labor nor the government announced about reformatting this idea, adjusted for the socio-economic situation in the country.