Implementing the pension reform is a priority of the Government and personally Prime Minister Volodymyr Groysman because it concerns everyone without exception, those who have already retired and those who are not even thinking about this yet.
The main goal of the pension reform is to restore justice in determining pension payments both today and in the future. The key idea is simple — any person who has worked honestly their entire life should be guaranteed a decent pension. At the same time, the Government is concerned with improving Ukraine's pension system. For example, it continues work on introducing the pension savings system and promoting the voluntary system of non-governmental pensions. Further, implementation of European operating standards of the Pension Fund of Ukraine agencies is an integral part of the pension reform. The use of contemporary information and management technology, single standards of the quality of public service should make the provision of services to Ukrainians convenient and effective.
It is virtually for the first time that the approach to the pension reform is thorough. The Law of Ukraine On Amending Certain Legislative Acts of Ukraine to Increase Pensions amended 29 legislative acts of Ukraine. The Law came into force on October 1, 2017 in part and on January 1, 2018 in full.
For example, pensions of 10.2 mln out of a total of 11.7 mln pensioners were increased on October 1, 2017. Some of these people are now receiving double their previous pension. About 4.6 mln Ukrainians already get an extra UAH 100 to 500 to their pension. The monthly increase is UAH 500 to 1,000 for 1.3 mln people. 800K pensioners got a monthly increase of UAH 1,000 to 1,500. Another 1.3 mln Ukrainians get an extra of UAH 1,500 or more monthly. As few as 2.3 mln pensioners got a raise of up to UAH 100.
This is the first stage of the reform designed to improve the redistributive pension system, do away with pension leveling, and make determination of pension payments fair. Its other objective is to support financial stability and reliability of the redistributive pension system and lay the foundation for the reform's next steps — implementing compulsory pension savings and supporting the operation of a voluntary pension savings system.
11.7 million pensioners now live in Ukraine, including eight million (68%) who prior to the reform only received the minimum pension that was inadequate to meet even the basic needs. Actually, the amount of payments did not depend on length of service and wages from which the person made contributions. Apart from being unfair to people, this situation did not encourage legal employment and payment of contributions to the Pension Fund.
Statistically, there is only one worker per pensioner who makes regular payments to PFU. 26 mln people living in Ukraine are aged 18 to 60, while pension contributions were paid before October 1, 2017 by only 10.5 mln people, with the government paying for an additional 1.5 mln. The number of covered persons was 12,971.3K as of November 1, 2017. So, employers and the stage make payments for 75% of the employed workforce, while 25%, or about four million able-bodied people, do not make their pension contributions.
Pension recalculation rules existing prior to October 1, 2017 were not transparent and included a number of ratios, extras, allowances, and irregular indexation. Instead of being part of insured pensions, a significant portion of pension payments were simply an extra to raise them to the minimum wage levels.
In addition, pensions were paid under more than 20 laws with different special payouts (to civil servants, academics, people's deputies, journalists, teachers etc.).
Some pensioner categories enjoyed privileges, including early retirement entitlements.
All this left the system devoid of the principle of fairness and equality of the insured regarding pension payments and created significant financial pressures on the Pension Fund of Ukraine. In effect, the system operated almost at breaking point. Without changes, the government could become unable in five to ten years to guarantee pensions to its citizens.
The first stage of the reform, which started on October 1, 2017, involves reforming the redistributive system of general compulsory government pensions.
A revision or "updating" of pensions means changing the average wage in Ukraine used for calculations. The Ukrainian average wage grows every year, but the pension was last updated back in 2012 by using the 2007 average wage figures.
Prior to the reform, nearly one million persons only got the minimum pension of UAH 949, which was below the living wage. With the start of the reform, this was increased to UAH 1,373, the living wage for dependent people. This is the amount received by people without the minimum length of service. The minimum pension is UAH 1,452 for people that have at least the minimum length of service.
In addition, prior to the reform, pension could vary more by than three times depending on the year of award. This is why pensions that had not changed for the past five years were the first to be revised. Starting on October 1, 2017, the update mechanism increased pensions for 10.2 million persons.
It also revoked the 15 percent reduction for over 460 thousand working pensioners and restored payment in full.
A clear correlation is established between the size of pension and the amount of contributions and the duration of participation in the pension system. To claim payments, one needs to make contributions to the Pension Fund. The pension becomes larger with a longer length of service and larger contributions to the Fund.
Special conditions are revoked for awarding pensions for everyone other than servicemen, disabled Chronobyl victims, employees at harmful production facilities, and certain citizen categories that remain entitled to early retirement. These include tractor drivers, milkmaids, textile production workers, women who gave birth to and raised five or more children up to the age of six, persons involved in combat, the anti-terrorist operation etc. In addition, a new law will be drafted by late 2017 to update military pensions.
The Law of Ukraine On Amending Certain Laws of Ukraine to Increase Pensions requires annual (indirect) indexation of pensions starting from 2021 through their multiplication by the ratio equal to 50% of consumer price growth in the previous year plus 50% of growth of the average wage (income) from which contributions were paid for three calendar years preceding the previous year to the year of indexation.
In 2019–2020, the average Ukrainian wage (income) (from which contributions were paid) that applies for pension recalculation will multiply by the ratio equal to 50% of the consumer price growth in the previous year plus 50% of growth of the average wage (income) from which contributions were paid for the previous year to the year of indexation.
In 2017, the National Budget's subsidies to the Pension Fund were UAH 141.3 bn (or UAH 133.5 bn subject to CMU Resolution No. 901 dated 12/1/2017). This is almost half of the amount required to pay all pensions in the country! With the reform it started, the Government has laid the foundation for gradually curtailing the Pension Fund deficit and set the goal of stopping deficit growth in the next three years and make the Pension Fund self-supporting in the medium term. As a result, the Fund will be empowered to increase payments and, consequently, the pensioners' standard of living.
The second stage of the pension reform involves implementing the second tier of the pension system (general compulsory pension savings) and improving the third tier of the pension system (voluntary pension savings).
The next stage of reform of the pension system includes gradual changes in the system of pension savings. This will allow the diversification of pension sources for people and increase pension payments. The primary objective will be for the Government to submit the draft law on introducing the professional system of pension savings.
In July 2017, a working group was created at the Ministry of Social Policy to address the implementation of the 2017–2019 action plan. It faces, among other things, the objective of introducing the tier two pension system — the savings system of general compulsory government pensions — and developing the third tier — the non-governmental pension system.
Legislation is drawn up for this purpose to enhance the institutional capacity of financial sector regulators that will have oversight of pension savings entities. Conditions will be created for the operation of entities of the pension savings system, rules and instruments will be defined for guaranteeing rights of members of the pension savings system.