Ukraine adopts long-awaited pension reform

Ukraine’s parliament approved on Oct. 3 legislation
that reforms Ukraine’s pension system. The key goal of the changes is to reduce
the deficit of the state pension fund in the long term by raising the effective
retirement age (without changing the actual retirement age, which is 60 years).
That will be achieved by increasing the minimum official work tenure to qualify
for pensions from 15 years currently to 15-25 years in 2018 and 25-35 years by
2028 (with the longest tenure allowing retirement at age 60 and the shortest
allowing retirement at age 65). Those without required tenure can receive
social assistance at 65 years old.

 

Another way the reform reduces the deficit of the
pension fund (whose revenue covers just 50% of expenditures this year) will be
to raise pension contributions for certain categories of employees.

 

To soften the blow of these changes, the legislation
raises pensions for most current pensioners as of October, as well as
liquidates inequality in pensions depending on time of retirement (those
retired earlier now have lower pensions, ceteris paribus).

 

Also, the legislation foresees an automatic annual
adjustment of pensions based on average salary growth and CPI. The increased
pensions will require UAH 3.9 bln in additional expenditures from the Pension
Fund this year, which the government claims will be covered by the fund’s
additional revenue.

 

Also, the draft law foresees a possibility of some
mandatory contributions to private pension accounts as of 2019, but provides no
details on how this will function.

 

Alexander Paraschiy: Approval of
pension reform is the most critical condition for the IMF to provide the next
loan tranche for Ukraine. Now the next tranche looks more likely, but negative
surprises should not be completely ruled out.

 

In particular, it is hard to say whether all the core
conditions of the pension reform will satisfy the IMF. For instance, the Fund
is opposing the idea of mandatory private pension accounts in Ukraine. Also,
before approving the legislation on Oct. 3, lawmakers considered over 500
amendments and corrections to the draft law, whose content can’t be confirmed
now. Theoretically, such amendments could have radically changed the document.
The final version of the adopted law with all the approved amendments will be
only available when it’s published on the parliamentary web site. We expect
more clarity on the final version of pension reform and the IMF’s attitude to
the approved legislation in the coming days.

 

For Ukraine’s budget, the law’s adoption could have
negative short-term consequences, given that pension payments will increase
already in October. At the same time, it sets in motion a gradual decrease of
the Pension Fund deficit and respective deficit of the state budget, in the
long term.