German-like pension system to be applied in Azerbaijan
By Trend
Azerbaijan plans to bring its pension adjustment system to mirror
Germany's. A special twinning project aimed at creating conditions
for the reform of the pension system is being implemented in the
country in order to achieve this goal.
The project named "Support to the State Social Protection Fund on
the introduction of funded element within the insurance-pension
system, establishment of non-state pension funds and development of
legal framework for regulating their activity" will involve
ordinary people in the process of creation of their own pension and
will develop the ways of development of non-state pension system
which is very common in many European countries including
Germany.
The project is being implemented by the State Social Protection
Fund of Azerbaijan together with the Ministry of Welfare of Latvia
and the German Association for Social Security Policy and Research
and is funded by the EU in line with the EU-Azerbaijan ENP Action
Plan. The project was launched in May, 2014 and will continue 18
months.
The project does not stipulate any final decisions. The EU experts
will just share their experience, help to develop the ways of
non-state pensions introduction fit for Azerbaijan and show the
advantages of the non-state pension system.
"Non-state pension system ensures the possibility for every
individual to create additional savings for his pension in the
private pension funds according to his free choice, thus increases
people's financial security in retirement," adviser to the project
and representative of Latvian Ministry of Welfare Agrita Groza told
Trend in an interview. "On the other hand, as savings of pension
funds constitute an important part of long-term investment
resources, it will promote development of financial and capital
markets of country and promote welfare of country."
Even if the Azerbaijani government decides to introduce a non-state
pension system it will take quite a long time and huge amount of
work to implement it. For example in Latvia, it took 12 years to
develop a modern, sustainable pension system, according to Agrita
Groza.
In fact very often elderly people in Azerbaijan complain that their
pensions are much lower compared to those of other Europeans. On
one hand they are right. In 2014, the average monthly pension in
Azerbaijan hit 183 AZN ($233). Pensions in the EU countries are
indeed higher. But on the other hand material well being of
European and especially of West-European pensioners is not resulted
just from generosity of the state they live in but mainly caused by
their own efforts prior to retirement. As a rule people in European
countries make regular contributions towards their future pensions,
they work till quite old age and then get high pensions. Meanwhile
those who prefer earlier retirement with small or no saving while
working have quite modest pensions.
For example Germany has no general minimum pensions, but just a
means-tested transfer payment in case of insufficient income for
persons aged 65 and older, as well as for disabled persons exist.
Pensions in Germany stem from different sources and non-state
funding as different kinds of private savings make a great part
German pensions.
In general three tiers of pension schemes exist there: mandatory
pension schemes as basis of retirement income of different groups
of the population, occupational schemes, and private voluntary
arrangements for old-age provision.
The most important element of the first tier is the social pension
insurance. Earlier it was a defined benefit scheme based on
specific targets for the level of pensions, while financing was
dependent on variables (employer's and employee's contribution
payments and federal grant).
Since 2001 the character of the scheme is changing towards a type
of defined contribution scheme. Funds paid in by contributors
(employees and employers) are not saved (or invested) but are used
to pay current pension obligations (pay as you go or redistributive
model).
Retirement age also have effects on the pension amount. Starting in
2012 the standard retirement age of 65 will be increased to 67
(scheduled for 2029) - from 2012 to 2023 the retirement age will be
increased by one month per year reaching 66 in 2023. From 2023 the
retirement age will be increased yearly by 2 months to reach 67 in
2029. Each missing year results in a 3.6 percent reduction in the
pension entitlement.
Occupational pension are mainly pensions for old-age. They are in
general voluntary in the private sector. Traditionally, pensions
were mainly defined-benefit, employer-financed and
"capital-funded," but not necessarily linked to the capital market.
However, a shift is taking place towards other types of
occupational pension arrangement that are linked to the capital
market as well as towards arrangements being financed mainly
(directly) by employees (and no longer employers) and towards
defined contribution instead of defined benefit.
Moreover there is a great variety of voluntary capital-funded
additional types of saving for old age in Germany, some with risk
pooling (life insurance), others without such insurance elements,
and some types are tax-privileged.
German pension system is not unique. Latvia for example has a
similar system with some small differences.
Meanwhile people in Azerbaijan are very poorly involved in the
pension creation process and pension payments. The pension system
in the country consists of basic component which is paid by the
state in a fixed amount, independent of wage or contribution
history and the "insurance" component which comes from the
contribution paid to the system in the amount of 25 percent of
wages (22 percent from the employer, 3 percent from the employee).
Following raising of the retirement age in Azerbaijan, the
retirement age for women will hit 60 years and for men will remain
at 63 years as of 2015.
However there are plans to develop a new component based on real
accumulation and investment of social insurance contributions with
overall objective to develop the insurance-pension system. These
plans do not envisage cancellation of state-funded pension. This
new component will just allow the people to think in advance about
their pensions and make some addition to the fixed pension payment.
And the above-mentioned project is aimed at meeting this goal.
"The project partners and experts will work together to develop the
legislation for establishment of the funded component in the state
pension system and facilitation of non-state pension institutions;
to establish the mechanism for accumulations and management of the
funds on the individual funded accounts; to elaborate a
communication strategy to raise public awareness concerning the new
funded component of the state pension system," Agrita Groza told
Trend.
The next expert mission from Latvia will come to Baku in November,
the adviser said. Two of them will start feasibility study by
analysing obtained data from State Social Protection Fund, State
Statistics Committee, Economy and Industry and Labour and Social
Protection of Population Ministries, intended to prepare detail
calculations of different scenarios of funded pension component in
the state social insurance system.
"The results of feasibility study will be used for preparing
seminar in December which will be starts for the development of a
detailed blueprint of the funded system and development of a
blueprint to facilitate and regulate the development of private,
voluntary, pension arrangements," Groza said.
The third expert will investigate existing IT systems of the State
Social Protection Fund, which support the implementation of basic
and "insurance" components, analyze their performance and operation
with purpose to developed recommendations of necessary
improvements, developments and technical solutions for introducing
the real funded component in the frame of the state insurance
pension system, according to the adviser of the project.
"It is necessary to have common cooperation of different state
institutions - State Social Protection Fund and other relevant
institutions on key issues to be addressed for the development of
private, voluntary, pension arrangements," she said. "Very
important task is providing public awareness and communication with
potential beneficiaries - employers, employees, self-employed,
farmers and with other groups of population at the working
age."