Volodymyr Groysman introduced Government's draft law on pension reform

Prime Minister of Ukraine Volodymyr Groysman at a Government’s meeting on May 17, presented the main provisions of the draft law of Ukraine "On amendments to some Laws of Ukraine on increase of pensions" offered by the Government in the framework of the pension system, which should be triggered starting 1 October 2017.

While presenting the draft law, Volodymyr Groysman stressed that the core objective for the Cabinet of Ministers has been and remains the development of the national economy and the opportunity to give citizens what is "rightfully theirs". To this end, at the beginning of the year the Government had increased the minimum wage twofold and considers now the issue that will allow the Government to increase retirement payments.

"During the year we adopted a decision to increase the minimum wage twofold and we are committed to increase pensions for retirees. The Government will prolong its endeavors towards accumulation of funds in order to improve social standards for citizens. Our seniors should receive decent pensions - compensation for their tangible input to the work. The restoration of social fairness as well as the abolishment of leveling which completely discourages everyone", stressed the Head of Government.

He noted that now the Government paves the way to ensure an annual automatic indexation of pensions that will increase welfare of the Ukrainian citizens as well as to enhance the sense of security.

“Our essential task is to pay tribute to those people who are currently working and producing national product, who develop the national economy. At the same time we must not forget those who for decades have been working for the benefit of the country and are retired now, but most regrettably these people are facing difficult life situations now”, urged the Prime Minister.

He stressed that amendments proposed by the Government is a system work that updates the mechanisms which existed previously and provides new financial and social bases of relations between Government and citizens. Volodymyr Groysman thanked to President of Ukraine Petro Poroshenko and former Prime Minister of Ukraine Arseniy Yatsenyuk for their significant contribution to stabilizing of the economic situation in the country, which allowed the country to implement the necessary reforms.

The Cabinet of Ministers of Ukraine at its meeting approved the draft law on the proposed amendments and submitted it to the National Reform Council for further consideration. The Prime Minister will appeal to the President of Ukraine with a request to hold such a meeting within the shortest possible period of time. Further, the draft law will be sent to Parliament for discussion and adoption as required by the Medium-Term Action Plan of the Government and by commitments of Ukraine enshrined in the programme of cooperation with international partners.

“After the adoption of this draft law, I take full responsibility for the introduction of the aforesaid reform and for a positive result for the Ukrainian pensioners. I am committed to bear personal and political responsibility”, summed up the Prime Minister.

Presenting the bill, the Prime Minister stressed that the pension system, in what the majority of pensioners are living below the poverty line, requires immediate change. Thus, 8 million out of 12 million seniors receive only the minimum pension UAH 1312 (since May this year), which makes up only about 50% of the consumer basket in the actual subsistence minimum for persons who became disabled. The average pension in Ukraine is UAH 1828 (as of 1 April 2017).

Apart from that, the system for calculating pensions is unfair. The calculation formula, which involves the use of coefficients, payment of increment, sum of indexation, is unclear, and this doesn’t allow people to calculate their future pension, thereby negatively affecting the incentives to pay contributions. Moreover, the differentiation of pensions depending on the income has been completely lost. Currently, 8 million persons have been assigned supplement to the minimum pension.

The current system also generates discrimination based on the year of retirement. The last updating of pensions was carried out in May 2012, while the minimum wage was increased 9 times. As a result, there exists segregation of pensioners by year of retirement – the sum of pension with having the same pension insurance record and wages can vary by over 3 times, while pensioners are sliding into poverty with time.

Unfairness in the payment of contributions to shape a pool of funds set aside for a worker's future benefit gave rise to a low level of pension insurance coverage for the employed population, 25% of the employees do not pay Unified Social Tax (16.3 million people makes up the employed population). 10.5 million out of 26 million people aged 18 to 60 years pay contributions on a regular basis, for 1.5 million people pays the state.

Government initiatives to ensure the increase of pensions and sustainability of pension system

As the first step the pension reform offered by the Government provides for the modernization of pensions. With this purpose the Government introduces single rules of calculating the size of pension payments.

It is introduced a new formula for calculating pensions with a uniform approach to both categories ‘old’ and ‘new’ pensioners using the average wage level UAH 3764.40 (previously, depending on the year of assigning pension it ranged from UAH 1197.91 up to UAH 3764,40), i.e. the showing made a basis for calculating pensions will be increased almost threefold. As a result of increase of pensions in the case of modernizing wage to UAH 3 764.40 more than 5 million Ukrainian pensioners from 1 October 2017, after the adoption of this bill by Parliament, will receive an increase of pensions over UAH 1 thousand monthly for categories belonging to the range of up to UAH 200, of which about 4 million Ukrainian pensioners will receive UAH 300 and over UAH 1 thousand as a monthly increase, explained the Prime Minister.

The aim of the pension reform is to ensure a deficit-free budget of the Pension Fund in the medium term, what will occur through the establishment of requirements to the duration of insurance qualifying period and the minimum size of the insurance installment.

After raising by the Government of minimum wage in the country contributions to the Pension Fund have amounted to UAH 295 680 a year and exceeded expenses amounting UAH 269 352.

The Prime Minister stressed that while drafting the pension reform, the Government had managed to avoid raising the retirement age. "The retirement age remains 60 for people who have an insurance period of 25 years", noted the Head of Government.

Herewith a flexible corridor of the retirement age and the possibility of compensation for the absent pensionable service is introduced - citizens who lacks sufficient length of service to satisfy the requirement regarding minimum pensionable service, will have an opportunity to pay contributions for the missing years (maximum 5 years). "The pension system doesn’t mean social assistance, but contributions of a person who works to have benefits in old age. In fact, this is the way all the pension schemes of the world are operating", he said.

Another novelty is the Government has envisaged for the abolition of special conditions of retirement, excluding military personnel. In this context, it is stipulated for replacement of a mechanism of compensation of old age pensions on preferential terms for the payment by employer of the increased single contribution rate at 15% and 7% for employees engaged in work provided by the lists №1 and №2, that are to be expanded, and the introduction from January 1, 2019 through Accumulative Pension Fund of accumulative occupational pension programs for certain categories of persons under 35.

From 1 January 2018 the right to assign pensions for the seniority will be revoked for employees in education, health, social protection and other sectors "who had more benefits when retire through low wages". In this regard, the Prime Minister noted that a year before the Government had upped salaries for teachers and doctors and will prolong this increase. "Ukrainian teacher, Ukrainian doctor must get decent wages", he stressed.

The Government aims to achieve stability of the pension system that will provide fair pension payments in the future as well. In this context, the Cabinet of Ministers proposes to cancel the limitation of pension rates for working pensioners (85% of pension payment, but not less than 150% of the subsistence minimum for persons who became disabled).

Moreover, the Government also stipulates in the bill for an automatic norm of annual indexation (recalculation) of pensions to protect against inflation: taking into account the financial possibilities of the consolidated scheme, but not less than by 50% of the growth of average monthly wages for three years and by 50% of the consumer price index. "It's a guarantee that no one else in the country will leave the needs of the Ukrainian pensioners until later. We have shaped a system norm that would ensure modernization and increase of pensions annually. This is an extremely important step, none has done that before", said Volodymyr Groysman.

In addition, the Government offers to envisage for 2017 a second increase of social standards by 5% from 1 October instead of 1 December, as was planned by the State budget. Thus, this reform launched on October 1 will allow the country to increase pensions for 9 million Ukrainian pensioners out of the total 12 million seniors.

Speaking about the financial basis of the pension reform, Volodymyr Groysman noted that additional need for funding to upgrade pensions from October 1, 2017 makes up UAH 11.2 billion and another sum worth UAH 800 million to trigger the increase of social standards starting October 1 instead of December 1. The overall sum makes up UAH 12 billion.

For 4 months of 2017 the Government has provided as revenues to the Pension Fund additional UAH 7.9 billion after the increase of the minimum wage. It is expected that by the end of the year surplus of revenues of the Pension Fund will exceed UAH 4 billion that will be used to allot the necessary funding UAH 12 billion. Thus, "we have already have money to launch it on October 1", said Volodymyr Groysman.

In 2018 the additional need in funds for payment of the "modernized" pensions based on improving the living wage will make up UAH 30 billion. However, additional revenues from the initiatives envisaged in the bill, and the growth of revenues of the Pension Fund of Ukraine, which is being observed nowadays, will equal the needed UAH 30 billion and be sufficient for upgrading and payment of pensions in 2018, said the Head of Government. Everything exceeding this figure will be used to repay the deficit of the Pension Fund and to ensure sustainability of the pension system.