Ukraine cabinet presents draft of pension system

Ukrainian PM Volodymyr Groysman presented draft legislation on changes to the pension system on May 17. No documents were made public, only a presentation with the key initiatives of a renewed pension system.

The changes are aimed at the removal of the pension fund deficit in the long-term by raising the revenue of State Pension Fund (the latter not specified in the presentation) and limiting the inflow of new pensioners. While the retirement age was left unchanged in the draft (60 years), the effective age will be increased. In particular, the minimum requirement for years of service is suggested to grow to 25 years beginning in 2018 from 15 years now. By 2028, the years of service requirement will be increased to 35 years. Those who do not comply with the years of service requirement will have pensions only at age 63-65. The Cabinet also suggested abolishing privileged pensions (for new pensioners) except for the military, as well as providing some benefits for later retirement.

To mitigate the impression from the tightened rules the Cabinet proposed the “modernization” of pensions. This includes the introduction of uniform rules for pension calculation (removal of discrimination of pensioners depending on the period they retired) and stipulating a minimum amount of indexation of pensions, which will be a function of the inflation rate and the average salary (pensions have been effectively frozen for many years). On top of that, the Cabinet suggests to increase the minimum pension by 10% from October 2017, ahead of the current December date. The initiatives will cost an additional UAH 12 bln to the budget and Pension Fund in 2017 (0.5% of GDP, 4% of total planned Pension Fund revenue) and UAH 30.7 bln in 2018 (about 1% of GDP), for which the government claims it has found compensators.

Adopting  pension reform is among the key preconditions for Ukraine to continue cooperation with the IMF. In the latest memorandum with the IMF, key features of the expected reform were mentioned: offering a wider range of retirement options with benefits for late retirement; lengthening the effective retirement age to decrease pension spending in the long-term; assuring that pensions are proportional to people’s contributions and “adequate in real terms”. An IMF mission arrived in Ukraine on May 16 with this topic in mind.

Alexander Paraschiy: In general the proposed concept looks in line with the IMF demands. The effective retirement age was increased through tightening the rules on years in service. Also, incentives were created for staying employed longer. At the same time, we have concerns about the idea to adjust pensions this Autumn, which will translate into extra expenses for the Pension Fund. Given that we have the IMF mission in Kyiv specifically to discuss this proposal – the IMF officers also look like they have questions about the changes. 

So far, it looks like the changes presented predominantly reflect Groysman’s view on the reform rather than a draft law concerted with all parties in Ukraine. Still, even with some reservations, we see high chances that the IMF will accept the proposed draft. It is likely that the draft law will be passed to the parliament by early June. Some increase in pensions improves the chances of the bill passing through the parliament, but there is a risk that some of the Cabinet’s initiatives to increase Pension Fund revenues (not mentioned in the presentation) will meet resistance, but we still see a high likelihood of its approval this summer.