Azerbaijan to introduce German-like pension system

Azerbaijan to introduce German-like pension system

Baku, Azerbaijan, Oct. 21

By Elena Kosolapova - 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."

Edited by C. S.

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