Contemporary Problems of Social Work


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Creation of a System of Early Non-Governmental Pension Insurance in Russia

Автор/Author: Bataev V.V., Pochinok N.B

Аннотация/Annotation:
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Список литературы/References:

1. ABC-Book for a Retiree. Interview with V.D. Roick // Russian Newspaper, 20 November 2008.


2. Ahead-of-Schedule and on a Share-Basis // Russian Newspaper, 05 June 2014.


3. Materials of the Round table “Pension System: Prospects of Development” in the framework of the International Investment Forum “Sochi-2014”, 18-21 September 2014 [Electronic resource] URL: http://forumkuban.selivyorstov.ru/2014/player/?event=2014091914 (access date: 20 December 2014).


4. Review of Financial Stability prepared by the Bank of Russia on 22 October 2014 [Electronic resource] URL: http://www.cbr.ru/publ/Stability/fin-stab-2014_2-3r.pdf (access date: 20 December 2014).


5. Government Resolution N 2524-r of 25 December 2012 // Collected Legislation of the Russian Federation. – 31 December, 2012. - N 53 (Part II).


6. Solution of Social Problems – RSSU Priority. Interview of Natalya Pochinok // Broadsheet JugTimes, issue of 15 October 2014.


7. Labor Code of the Russian Federation of 30 December 2001 N19 7-FZ // Collected Legislation of the Russian Federation. – 7 January, 2002. - N 1.


8. Federal Law of the Russian Federation N 173-FZ of 17 December 2001 “On Retirement Pensions in the Russian Federation” // Collected Legislation of the Russian Federation. – 24 December, 2001. - N 52.


9. Federal Law of the Russian Federation N 75-FZ of 7 May 1998 “On Non-Governmental Pension Funds” // Collected Legislation of the Russian Federation. – 11 May, 1998. - N 19.


10. Federal Law of the Russian Federation N 400-FZ of 28 December 2013 “On Non-Contributory Pensions” // Collected Legislation of the Russian Federation. – 30 December, 2013. - N 52 (Part I).


11. Maloletko, A.N. Monitoring and auditing: manual/ A.N. Maloletko.- M.:KNORUS, 2006. –pp. 93-97. -312 p.


12. Iluhina, G.I. & Maloletko, A.N. Management analysis in industries. Lecture notes and teaching complex/edited by A. N. Maloletko. -M.: Paleotip, 2008

Содержание статьи/Article:

One of the guidelines of implementing the Strategy of Long-Term Development of the Pension System in the Russian Federation (adopted by the Government Resolution N 2524-r of 25 December 2012) is reforming of the early retirement institution subject to the principle of preserving the system of safeguard to workers employed at the enterprises with specific working conditions, as well as establishing of a transition period for the people to get used to new conditions of pension provision [5].


Currently, in accordance with the Federal Law of the Russian Federation N 173-FZ of 17 December 2001 “On Retirement Pensions in the Russian Federation”, Article 27, there are more than twenty formal grounds for granting old-age retirement pensions [8]. Beneficiaries of early-granted pensions retire 5 and 10 years prior to the generally established retirement age, on condition that they have a necessary qualifying period of paying pension contributions to the Pension Fund of the Russian Federation and at least half of a special employment period in harmful and dangerous working conditions. Such people receive early-granted pensions until they reach the generally established retirement age.


“Liberal” criteria of eligibility for early retirement applied for decades are inconsistent with present-day conditions of market economy and are weakly dependent on real working conditions on job sites. The result is that each third employer is eligible for retirement before he or she reaches a generally established retirement age. At the beginning of 2013 one third of 33 mln retired people, i.e. 11 mln, were so called “early retirees”.


Moreover, employers paid to the Pension Fund of the Russian Federation only 22% of the payroll fund for any employee irrespective of working conditions at their job sites; but all pensions were paid from one and the same pool – a direct way to the budget deficit.  


Since 1 January 2013 the government designated a separate source of funding early retirement and introduced additional rates of insurance contributions to the RF Pension Fund for employers, whose employees work in harmful and dangerous working conditions. These additional rates amount to 2-9% of the payroll fund with a progressive taxation. And for employers having relevant results of workplaces assessment or a conducted special evaluation study of working conditions (hereinafter – SESWC) a special rate schedule was introduced with 2-8% of the payroll fund with a breakdown by subcategory of harmfulness.


Speaking about advantages of this system, it is necessary to mention its attractiveness both for the employees, as it provides protection by the time, and for the state, as it is jointly financed by all employers-payers of insurance contributions. Before the introduction of the aforementioned additional rates it was also interesting for employers with severe and special working conditions, as for them the rates of insurance contributions to the RF Pension Fund were equal, but people retired earlier. The advantage is also in the fact that our legislation provides a possibility to co-finance pensions in early non-governmental pension insurance on the part of the employee and the state.


And speaking about disadvantages of the existing system, it should not go unspoken that early retirement pensions cannot be inherited, as in case of survivorship or breadwinner’s disability the problems of supporting “early retiree’s” heirs are solved with the help of other social security instruments. For employers the trouble is that additional rates go into the pay-as-you-go (PAYG) pension system without any personification and formation of pension rights of the people working in these particular industries and professions. All-Russia branch associations of employers and major branch trade unions and their associations used to attract attention to the fact that branches-donors of the state pension system “stand shot”, providing early retirement pensions for the branches-recipients by their non-personified contributions in the framework of the PAYG system. It should be mentioned as well that at the end of 2013 a package of federal laws on reforming the system of non-governmental pension funds (NGPF) and introducing SESWC was discussed. At the project stage they contained an idea of setting-off additional rates to corporate non-governmental pension insurance instead of contributions to the RF Pension Fund, which did not appear at the discussion stage. Thus, in fact, early non-governmental pension insurance did not turn into a full-scale institution of early pensioning but still remains an ordinary instrument of additional pension insurance without stimulating mechanisms for employers. Under that logic, this situation will not result in attracting employees to this system and increasing the number of “early retirees” in corporate pension programs.


In 2002 – 2003 legislation on changing the institution of early pensions was already under way. As a result of studying the experience of Sweden, France, Denmark, Great Britain, the USA, Switzerland, Japan and the Netherlands where preferential pensions are formed in corporate occupational pension systems, it was found out that they were either voluntary, financed on the PAYG basis, or obligatory, i.e. additional to the governmental ones. Draft Federal Law “On Occupational Pension Systems” went through the first reading and was postponed for a long time. The main reason of its “freezing” is the fact that it stipulated additional tax burden for employers – from 7% to 14% of the payroll fund without any special tax preferences. According to V.D. Roick, Doctor of Economics, seven years of pension reform did not result in finishing the formation of all elements of a new retirement system. In particular, occupational pension systems have not been created yet. Eventually, the sixth part of the pension budget (about 240 bln RUB in 2008) is to be directed to early retirement pensions for people working in harmful conditions. But the main problem of these employees is that since 1 January 2003 they have not earned even a ruble for early retirement pension [1].


Negative experience of the previous decade helped to make conclusions. And at the end of 2013 a project of creating a system of early non-governmental pension insurance (hereinafter – the Project) was developed. This Project was prepared by a spearhead working group under the Ministry of Labor and Social Protection of the Russian Federation in partnership with representatives of the National association of non-governmental pension funds, All-Russia branch associations of employers and major non-governmental pension funds of Russia. The 2013-2014 information on the number of employees in harmful and dangerous working conditions, for whom insurance contributions according to additional rates are paid and who has an average special qualifying employment period, necessary for the development of the Project, was given by the Pension Fund of the Russian Federation.


When the development was completed, the Project was submitted to the Administrative office of the Russian Union of Industrialists and Entrepreneurs and adopted on 18 June 2014 as a Concept bill framework. On 30 September 2014 the Expert Board of the State Duma Committee on Financial Markets also approved the document and agreed with the approaches suggested. The urgency of the early retirement institution transformation was stressed by the Chairperson of the Expert Board N.B. Pochinok: “It is necessary to develop and present new instruments – early retirement, pension savings. It is important to give state guarantees – the instrument of co-funding on the part of the budget… Pension funds went public, so they are transparent. There are all grounds to say that now the system is operational” [6].


As recommended by the Ministry of Labor and Social Protection of the Russian Federation, line ministries – the Ministry of Finance of the Russian Federation and the Ministry of Economic Development of the Russian Federation – forwarded substantive remarks. 


Finally, basic provisions of the Project were sounded at the International Investment Forum “Sochi-2014”, 18-21 September 2014, in the framework of the Round table “Pension System: Prospects of Development” [3].


It is worth laying the emphasis on the key point in the Project: its main objective is to increase the total level of pension insurance of employees working in specific (harmful and dangerous) working conditions and retiring before attaining a generally established retirement age. In order to establish dependence of contributions, paid by the employer, on the employees working conditions and to insure pension rates differentiation depending on the length of employment period in specific working conditions the proposed document allows for transition to the system of early non-governmental pension insurance on the basis of non-governmental pension funds. The Project develops provisions of the RF Federal Law N 75-FZ of 7 May 1998 “On Non-Governmental Pension Funds” [9] concerning the possibility of pension co-financing on the part of the employee and the state as well as the head-note of the Strategy of state co-financing application for “certain categories of the insured”. The main provisions of the Project will relate to the trades enumerated in Article 27, paragraphs 1-18, of the Federal Law of the Russian Federation N 173-FZ of 17 December 2001 “On Retirement Pensions in the Russian Federation” [8]. The Project regulations will be implemented in two stages. At the first stage – since 1 June 2015 – only people with the necessary special employment period will be able to join the system of early non-governmental pension insurance. At the second stage – since 1 January 2016 – other representatives of the mentioned professions will be able to use programs of early non-governmental pension insurance but with different coefficients of state co-financing, from 1 to 4.


The Project of early non-governmental pension insurance provides for the winning of all three participants of social partnership – employees, employers and the state.


The basic difference from corporate pension programs is that the latter are approved by local regulations and standards of the employer, and early non-governmental pension insurance – by a collective employment agreement.


Obvious advantages of the early non-governmental pension insurance system for employees lie in providing protection of their rights via the institution of social partnership, as when these benefits are included into collective employment agreements and industry agreements, they go through the “melting pot” of collective bargaining and are reviewed for compliance with the employees’ interests. In accordance with the legislation, the retirement program of early non-governmental pension insurance is to be approved as set forth for collective employment agreement conclusion. Evident and important advantages are also participation of the state in pension co-financing and the right to inherit early retirement pensions.


This system being put into practice, employers will also win, as their financial expenditures will be reduced due to a lower tariff rate (2% of payments and fringe benefits to employee involved in the activities named in Article 30, part 1, paragraphs 2-18, Federal Law of the Russian Federation N 400-FZ of 28 December 2013 “On Non-Contributory Pensions” and 4% of payments and fringe benefits to employees involved in the activities named in Article 30, part 1, paragraph 1 of the abovementioned Federal Law) instead of additional rates to the RF Pension Fund. Moreover, they can finance early retirement pensions only of their employees personifying contributions to individual retirement accounts (IRA). Finally, companies will have an opportunity to create a more flexible system of human resources management, which will serve to their own interests and increase long-term loyalty.


Speaking about the influence of the early non-governmental pension insurance system on the improvement of working conditions, the first thing to mention is a considerable change of working conditions over the past few decades. According to Article 226 of the Labor Code of the Russian Federation, employers are to spend at least 0.2% of production costs to the improvement of working conditions and labor protection [7]. Given that the number of employees at harmful working places is not constant, the employer has to calculate a less cost-intensive approach: either additional rates to the RF Pension Fund or improvement of working conditions.


An important role of additional rates should be mentioned as well: over the past year and a half the number of employees, for whom contributions on the basis of additional rates are paid, decreased from 4.5 to 3.6 people. This is a cumulative result of introducing additional rates, SESWC application and a new sensible view of working conditions after workplaces assessment.


Discussing advantages of the early non-governmental pension insurance system for employees, we already mentioned that the state would take part in early retirement pension co-financing: at the first stage of the program introduction – one-to-one with the employee, at the second stage – one-to-four until the necessary special employment period is achieved, and then one-to-one.


SESWC will be directly relevant to the early non-governmental pension insurance system. Workplace conditions will be assessed based on the SESWC results, as well as division into classes and sub-classes of harmfulness and, correspondingly, additional tariff rates from 2% to 8%. As both SESWC and early non-governmental pension insurance are components of social partnership, socially responsible (and socially irresponsible) employers will calculate and decide: whether to pay additional rates to the RF Pension Fund, thus making it take further care of “early retirees”, or create their own systems of early non-governmental pension insurance via collective employment agreements and make employees take care of their future early retirement pension together with the employer and the state. It is worth mentioning that according to the Project regulations all scheduled changes deal only with future grants of such pensions. Retirees, receiving pensions already granted, will not be affected by these changes.


It should not be overlooked that creation of the early non-governmental pension insurance system will eventually reduce the state’s expenses and solve the problem of financing early retirement pensions from the budget, even despite the fact that in any case early old-age retirement pensions will be granted to definite categories of “early retirees”. It is noteworthy that early retirement pensions used to be a burden on the whole PAYG pension system – insurance contributions were paid by all taxpayers according to common rates, but only representatives of a limited scope of trades and professions retired before the generally established retirement age.  And only now an independent source of finance has appeared. As financing is transferred to the early non-governmental pension insurance programs, responsibilities for paying early retirement pension will be also transferred to them, while the RF Pension Fund will pay only a certain part of early old-age retirement pension proportionally to a special employment period achieved and on condition of having a pensionable service.


According to model analysis, effect for the state can be expected in 2025, in a ten-year period after the Project start-up when the reduction of insurance pension payment exceeds additional budget spending.


State spending for “early retirees” will also be reduced due to the decrease of the number of employees in harmful and dangerous working conditions (in the first half of 2014 additional rates were paid for 3.6 mln people, 900 people less than a year before) and strengthening of requirements to pensionable employment period (15 years of pensionable service) and requirements to coefficients (at least thirty individual pensionable employment coefficients) in the pension legislation under the Federal Law of the Russian Federation N 400-FZ of 28 December 2013 “On Non-Contributory Pensions” [10].


The system of early non-governmental pension insurance (hereinafter – the System) is still having some problems for the participants of the pension market – employees, employers, non-governmental pension funds, the state. And attempts are made to solve them. In particular, as in any version of non-governmental pension insurance, employees’ concerns are connected with the fact that they pay their own money as contributions. Hence, it is reasonable to attract employees to the System and solve other issues of social partnership through All-Russia and branch trade unions. In the process of the Project implementation employers are sure to have labor contribution in the employees’ integration and promotion of their loyalty to corporate pension programs as well as in bookkeeping of special programs. When choosing optimum alternatives for solving these problems, the main thing is to provide a rate of replacing the earnings lost comparable to the level of the existing state one and, of course, to avoid social strain that can arise in connection with the program introduction.


Model analysis of the evaluation of the employee’s participation in the System show:


at the first stage: increase of the rate of replacing the earnings lost by two pensions for the employee working for 5 and 10 years after joining the System can amount to 5% and 10% accordingly;

at the second stage: aggregate rate of replacing the earnings lost by the pension for the employee joining the System after half of the special pensionable service and having full-length pensionable service and full-length pensionable service plus 10 years can amount to 35.4% and 42.5% accordingly (for comparison – people not participating in the System have replacement rate of 33.1%).


Using the suggested model, the state solves the problem of delegating responsibility to the zone of employing companies. But it is important to note that a comparable replacement rate is possible only at the specified proportions of co-financing. So, at the stage of the Project introduction the risk of additional expenses arises. However, taking into consideration practical experience of involving employees in corporate pension programs and to the program of state co-financing of additional insurance contributions (and these are 2-3% of employees during the first three years of the programs start-up), it can be expected that not all employers will immediately join the program and, hance, federal funds budgeted for additional insurance contributions under the AIC program will be sufficient until 2017.


In the “Review of Financial Stability” prepared by the Bank of Russia on 22 October 2014 mega-regulator pointed out that the development of the voluntary system for the accumulation of pension savings in conditions of people’s mistrust to the pension system was highly improbable; employers were not eager to develop corporate pension programs as well; and civil servants also did not see any prospects for voluntary corporate pension insurance in the circumstances formed [4]. Taking into account half-hearted ambiance to non-governmental pension insurance currently prevailing, it is possible to be optimistic about the chance that employers, civil servants and trade unions will support programs of voluntary early pension insurance.  In corporate systems, where non-governmental pension insurance is an instrument of HR policy and bases of participants-savers are stable, as a rule permanent awareness-building of the staff, trade unions and employers’ associations is underway in order to promote loyalty to the system. The whole process is formalized in collective agreements and industry agreements, and this is a preferred way of introducing the non-governmental pension insurance system. This pension product is addressed to definite groups of employees, named in Article 30, part 1, paragraph 1, Federal Law of the Russian Federation N 400-FZ of 28 December 2013 “On Non-Contributory Pensions” [10]. As the product is pseudo-voluntary and quasi-obligatory, it is planned to implement it via the institution of social partnership as a compulsive element of collective and industry agreements.


Drawing conclusions, it is fair to state that creation of the system of early non-governmental pension insurance will for a certain extent be beneficial for all the participants of the system.


The state will transfer responsibility for paying early retirement pensions to the employers in the framework of social partnership and cope with a strategic task of developing corporate pension systems as the second level of the pension system in the Russian Federation.


The employers will reduce the expenses due to lower tariff rates and will finance early retirement pensions of only their employees. This situation will be instrumental in organizing a flexible system of providing non-governmental pensions to the employees in the company’s interests.


The employees will get co-financing of their contributions by the state, the right to inherit pension savings both at the stage of accumulation and at the stage of payment, and additional protection of their rights through the institution of socjal partnership.


As far as non-governmental pension funds are concerned, attraction of new clients exclusively on a voluntary basis will become their key objective. According to K.S. Ugrjumov, head of the National Association of Pension Funds, “It is also important to comply with the voluntary principle. These systems will not be enforced at the enterprises; they will be adopted when concluding collective agreements – with the employees’ participation. But the principle itself – the employee and the employer pay and the state supports – is correct” [2].


For NGPF creation of the early non-governmental pension insurance system will ring up a new type of activity and give impulse to their development. And the offer of a competitive pension insurance product financed from three sources will let them rise financial stability and investment attractiveness owing to the introduction of new funding sources.  

Ключевые слова/Tags1: non-governmental pension insurance, early retirement, co-financing, social partnership.