Technical Seminar for Social Security Actuaries and Statisticians. Financing of pension schemes

Transcription

1 Limassol, Cyprus, October 2008 Technical Seminar for Social Security Actuaries and Statisticians Financing of pension schemes Actuarial analysis of optimal financing of mandatory pension insurance scheme in Russia First Vice-Chairman of the Board of Directors Pension Fund of the Russian Federation Russian Federation ISSA/ACT/LIMASSOL/08/4(d)

2 Financing of pension schemes Actuarial analysis of optimal financing of mandatory pension insurance scheme in Russia First Vice-Chairman of the Board of Directors Pension Fund of the Russian Federation Russian Federation I. Target objectives of pension reform The objectives of the pension reform of 2002 are as follows: to strengthen the insurance principles in the pension system for younger generations; to upgrade the standards of living of pensioners (to prevent poverty of older generation); to provide long-term financial stability for the Pension Fund of Russian Federation (PFRF) budget. The overall implementation of the specified objectives of the pension reform is fully aligned with the optimal financing requirements of economy, because it leads to the elimination of pension payments that are not backed with the insurance contributions, and achievement of financial stability for the PFRF budget at the expense of its own assets. II. Results of pension reform after the first decade of its implementation For the period from 2001 to 2007, the average employment pension has increased by a factor of 3.2 in the nominal value and by a factor of 1.26 in real value (Figure 1).

3 2 Figure 1. Employment pensions by categories, Euro , ,4 57,2 71, ,3 41, Средний average размер amount пенсии of old по - age инвалидности старости pension в фактических in в actual фактических prices ценах ценах (end (на конец of (на the конец года) year) года) - евро - евро average amount of disability pension in actual prices (end of the year) Средний average размер amount пенсии of survivor по случаю pension потери in actual кормильца prices в фактических (end of the year) ценах (на конец года) - евро average amount of labour pension in actual prices (end of the year) Средний размер трудовой пенсии в фактических ценах (на конец года) - евро For the period from 2002 to 2007, the ratio of pension amount to the subsistence level of a pensioner has increased from to % (Figure 2). Figure 2. Ratio between nominal average old-age employment pension and subsistence level of a pensioner % year

4 3 By 2010, the average state social pension will reach the subsistence level of a pensioner. The state social pension is paid to the persons who for some reasons do not have rights for the employment pension. At the same time, the average employment pension will increase to % of the subsistence level of a pensioner (Figure 3). Figure 3. Actuarial estimates of employment pensions to 2050, Euro Среднегодовой - average employment размер pension трудовой пенсии по старости - subsistence level of a Прожиточный pensioner минимум пе The short-term and long-term financial position of the Pension Fund of the Russian Federation will remain stable, because the Russian legislation guarantees the PFRF liabilities at the level shown in the federal budget. However, during the pension reform implementation and in the long-term period, the PFRF budget will be affected by the permanent increasing deficit of the insurance contributions available to pay the insurance component of employment pension (since 2002, employment pension has been consisting of three components: base, insurance and saving, Figure 4). Figure 4. Actuarial assumptions of budgetary deficit of the Pension Fund of the Russian Federation, bln. Euro ,7 364, , ,5 61, , ,3-7,3-56,2-112,4-156,3-181, Текущий current budgetary дефицит deficit бюджета Текущие current revenues доходы current Текукщие expenditures расходы

5 4 According to the actuarial calculations, the ratio of insurance contributions to the payments of the insurance component of employment pension will reach 87 % in 2010 and then decrease to 48 % by 2020 (Figure 5). Figure 5. Ratio of insurance contributions to payments of insurance component of employment pension % % % 101 III. Actuarial analysis of negative impact of the pension reform in transition period The transition period of the pension reform will end in mid-2030s or early 2040s, when contributors whose whole career is covered by the post-reform system will start to retire. In addition to the above-mentioned deficit of insurance contributions paid to the PFRF for financing of the insurance component of pension, the major problems of the Pension Fund of the Russian Federation during the transition period will be as follows: Gradual decrease of a share of payroll subjected to taxes and insurance contributions as a result of the absence of the legal requirement for the periodic indexation of the individual tax limits. While in 2008, 8 % of payroll is non-taxable with respect to both pension tax and insurance contributions, according to the actuarial estimates, this percentage will reach 52 % in 2020 and 86 % in The above will result in the slowing down of the indexation of base and insurance components of employment pension, and subsequently in the decrease of the ratio of pension to the subsistence level of pensioner and the decrease of replacement ratio. Growing inequality in the pension rights of agricultural employees and other employees due to the reduced rate of insurance contributions for agricultural employees (Figure 6) % % 19.3% 20% Страховые insurance взносы contributions - Расходы expenditures на страховую for insurance часть трудовой component пенсииof employment pension - ratio of insurance contributions to payments of the insurance Обеспеченность выплаты страховой части трудовой пенсии страховыми component of employment pension взносами % 90% 80% 70% 60% 50% 40% 30% 10% 0%

6 5 Figure 6. Tax rates and insurance contributions Tax to finance the base component of employment pension + Insurance contributions Persons born in 1967 and after 8% - to the insurance component 6% - to the saving component 14% 14% - employees, excluding employees in agriculture 6% 10,3% 10,3% - employees in agriculture 17 Euro - fixed contribution paid by a self-employed employed person Actual impossibility for self-employed persons to accumulate an adequate employment pension due to the extremely low rate of insurance contributions defined by the legislation as a fixed amount. The existence of PFRF expenditures, which are not backed with insurance contributions, in particular, expenditures to pay enhanced pensions for work in hazardous and dangerous conditions. Under the pension reform a share of these pensions should be transferred to occupational pension schemes and financed by supplementary contributions paid by insurers. However, at present, no occupational pension schemes have been established. As a result, the Pension Fund of the Russian Federation is still subject to the additional burden of payment of over 9 million of early retirement pensions which constitute more than a quarter of the total number of pensions in pay. The base component of employment pension is not related either to the insurance contributions or to the employee s pensionable service. A qualifying condition for such a pension is at least 5 years of insurance coverage, and its amount is related to the pensioner's age, degree of incapacity and number of dependants. Essentially, the base component of pension is a state social pension rather than a component of pension insurance system. Its financing is supplemented out of the federal budget, because the tax rate of 6 % is not sufficient for this purpose (Figures 7 and 8). The higher rates of indexation (increase) of the base component of pension, which are scheduled in the PFRF budget for the forthcoming three years with a view of fight against poverty, as compared to the indexation of the insurance component of the pension, remove incentives for workers to accumulate the insurance component of the employment pension (because a unit weight of this component of pension is getting lower) and can encourage contributors to avoid paying insurance contributions. This is especially true in the case of self-employed persons, whose fixed insurance contributions are extremely low.

7 6 Figure 7. Structure of employment pension for pensioners retiring before 1 January 2002 EMPLOYMENT PENSION BASE COMPONENT INSURANCE COMPONENT Figure 8. Structure of employment pension for pensioners retiring after 1 January 2002 EMPLOYMENT PENSION BASE COMPONENT INSURANCE COMPONENT SAVING COMPONENT* * Payments for men born from 1953 to 1966 and women born from 1957 to 1966 will begin in Payments for persons born in 1967 and after will begin in 2022 (women) and 2027 (men). Ineffective accumulation of the saving component of employment pension. Over 96 % of insured persons who are entitled to contribute to the saving component, prefer to entrust their pension savings not to non-state pension funds but to the state managing company specialising in pension savings investment, which cannot provide high investment returns due to the limited list of permitted assets. As a result, the investment return achieved by this company is lower than the inflation rate. Meanwhile, the investment returns achieved by non-state pension funds exceed the inflation level only in a few cases. Therefore, by 2025 the weight of the saving component of the pension in the amount of the employment pension will not be significant (its weight will be lower than 0.4 %). At the same time, the funds transferred out of PAYG part of the PFRF budget to the saving part will reach in 2010, for example, 27 % of the amount of payments of the insurance component of the pension, and these transfers will continue to increase thereafter. This will essentially result in the reduction of the indexation rates for existing pensions (i.e., pensions to persons who do not have pension savings and who have retired prior to the pension reform). In order to ensure the current and the long-term financial stability of the Pension Fund of the Russian Federation as the insurer of the mandatory pension insurance scheme, to upgrade the standard of living of pensioners, to implement the basic insurance principles, to achieve the balance between the amount of pension and labour (insurance) contributions of each insured person and to assume solidarity in pension liabilities, it is necessary to implement immediately the package of further improvements of the pension reform.

8 7 IV. Actuarial proposals for optimal financing of the pension reform The multiple scenario actuarial costings for the long-term period (up to 2050 performed by the Actuarial service of the PFRF, have enabled to develop the package of further improvements of the pension system. This package includes the following proposals: 1. To transfer the base component of employment pension to the mandatory pension insurance scheme. 2. To eliminate a tax which finances the base component of employment pension and to achieve the revenues of the PFRF budget only at the expense of insurance contributions. 3. To transfer all kinds of non-insurance pensions and benefits to the state social pension scheme financed out of the federal budget. 4. To establish a minimum amount for all kinds of pensions to be at least equal to the subsistence level of a pensioner. 5. To establish annually the insurance contributions rate on the basis of actuarial calculations in such way that the annual contributions would be sufficient to finance current year pension payments (according to the actuarial calculations the insurance contributions rate should be at least 26 or 27 % as compared to the current rate of 20 %). 6. To set a uniform insurance contributions rate for all categories of insurers employers and to eliminate subsidies for special employment categories. 7. To increase an annual income ceiling subject to insurance contributions up to 25,000 Euros in 2010 and to establish its annual indexation according to the rate of growth in average wage. 8. To establish insurance contributions rate as a fixed amount for self-employed categories in such way as to be able to provide the employment (insurance) pension for the above-mentioned category at least at the subsistence level of a pensioner in Russian Federation in the year of benefit uptake. 9. To determine supplementary insurance contributions needed to finance the early retirement pensions due to the employment in unfavourable industrial, technological, natural, climatic or other conditions according to the national legislation for the persons who will not be transferred to the occupational pension schemes. 10. To determine a standard insurance coverage for old-age employment pension beneficiaries as 30 years (based on international standard for minimum social security replacement ratio of 40 %). In order to increase the efficiency of the saving component, it is necessary to undertake the efforts to increase investment return on pension savings, in particular, by diversification of investment instruments for pension savings and active consultations for insured persons in choosing investment companies or non-state pension funds. The proposed package is based on the actuarial costings and if it is implemented in the forthcoming 3-5 years it would enable to provide the balanced PAYG part of the pension scheme, to increase pensions over the subsistence level of a pensioner during the considered period, as well as to prevent or essentially reduce, starting from 2010, a decrease in replacement ratio of old-age employment pension in the frame of PAYG scheme.