Challenges of War and Necessary Solutions for Pensions in Ukraine

The challenges of war and necessary solutions for pensions in Ukraine were discussed in a column by Tetiana Salnikova, the director of the All-Ukrainian Pension Funds Administrator. The column was published on a Polish portal, which is the only official source of information on the pension savings system for workers in Poland (Pracownicze Plany Kapitałowe). You can read it in Polish here.

We are providing the English version.

Challenges of War and Necessary Solutions for Pensions in Ukraine

Prior to the large-scale invasion by the Russian Federation, Ukraine understood that due to demographic changes, solidarity pensions alone do not provide a decent life for elderly Ukrainians. Currently, we have 10 million contributors to social contributions and 10 million pensioners. Under these conditions, pensions are low. More than 5 million people receive pensions below 100 euros. Even for such pensions, social contributions are insufficient, and the state additionally allocates approximately 5 billion euros per year from the state budget for them.

The large-scale war has exacerbated demographic challenges. About 5 million people are forced to seek refuge from the hostilities in other countries. Due to the military actions, mortality has increased. Economic challenges have been added to demographic challenges: one-third of those who had jobs in February 2022 lost them. Half of the working population experienced a decrease in income.

To change the pension situation, Ukraine plans to introduce mandatory pension savings and develop voluntary ones. Currently, pension savings involve just under 900,000 Ukrainians with a total amount of only 100 million euros. This constitutes 0.1% of the country’s GDP. Ukraine ranks last out of 88 countries surveyed by the OECD in this regard.

After the planned pension reform, pension savings will involve 8 million Ukrainians, and within the first 5 years, it will be no less than 5 billion euros.

Currently, there are 58 private pension funds operating in Ukraine. Since the beginning of their operation in 2005, approximately 90% of contributions were made by employers for the benefit of their employees, in addition to their salaries. Currently, around 2,000 enterprises in Ukraine take care of the future of their employees in this way. For a long time, individual contributions were insignificant, but the war has changed us. We felt responsible for our future and the future of our country: over the past year, the volume of contributions from individuals is only one-fifth less than the volume of contributions from enterprises.

Ukraine introduced the pension savings system relatively late in the region. Therefore, it had the opportunity to incorporate all the safeguards against fraud, abuses, and vulnerabilities that other countries had developed over decades of trial and error. In practice, the system has proven its resilience, preserving people’s savings during the financial crisis of 2008, the beginning of the war in 2014, and now, during the large-scale invasion, without ceasing pension payments for a single day. Despite its positive results, it has not gained widespread acceptance due to the state’s long neglect of pension savings development, politicians’ reluctance to take responsibility for a complex reform with each new wave, and the traditional mistrust of Ukrainians towards financial institutions, provoked by the misappropriation of their funds by Soviet elites during the collapse of the USSR from the Soviet Savings Bank and scammers in the 90s.

To build a sustainable future for the country in the face of rapid aging and the challenges of war, it is crucial to maximize the inclusion of people in pension savings. For individuals, these savings will serve as an additional source of income during retirement. A solely solidarity-based pension will not be able to ensure a replacement ratio of more than 20%, but together with a savings-based pension, a person’s income in retirement will constitute at least 40% of their salary. For the country, an internal long-term investor will emerge, whose funds will aid post-war recovery and business development, wage de-shadowing, and capital market growth. If Ukraine invests in its own recovery using its own resources (pension savings), it can attract more foreign direct investment into such projects. This is always a risk-reduction factor for investors.

To fundamentally change the pension future for Ukrainians, it is necessary to implement a mandatory pension savings system, transition all types of preferential pensions to an accumulation principle (for workers in heavy and harmful industries, judges, etc.), and more. It is crucial to significantly develop voluntary pension savings now, without waiting for the end of hostilities, within the framework of existing legislation. In this context, the state must demonstrate leadership and set an example, while businesses and communities should seize the opportunities for development offered by this system.

The state can:

1. Coordinate the reform of corporate governance in state-owned enterprises and the development of pension savings: implement accumulation pensions for employees of state enterprises as an owner and employer.
2. Introduce pension savings for workers in socially important professions (possibly with the involvement of donor funds) who have taken on the main burden of social problems caused by the war and whose presence is critically important for the return of Ukrainian migrants. This includes medical professionals, teachers, social workers, rescuers, firefighters, police officers, and, of course, military personnel.
3. Allow pension contributions to be made for the benefit of Ukrainians not only by individuals, employers, and close relatives but also by charitable and civic organizations. This will help cover the most vulnerable categories of people with pension savings, including those most affected by the war, without spending a penny from state or local budgets.

Communities can:

1. Provide additional accumulation pensions to employees whose salaries are funded from local budgets, have significant social importance for the community, and need additional motivation to stay in the community—such as educators, social workers, and others, depending on the needs of each specific region.
2. Attract long-term capital for recovery and development from pension funds through municipal bonds and other instruments provided by legislation. Even during martial law, such bonds are in demand among pension funds.
3. Create their own pension fund, involve municipal enterprises and socially responsible private companies in the region in its participation, and subsequently attract a portion of the mandatory pension contributions of community residents. This will accumulate significant investment resources and participate in joint investment projects with foreign investors, businesses, and the Government of Ukraine.

Businesses can:

1. Attract top talent and reduce staff turnover by implementing pension savings for employees with tax savings of up to 50%, using tax incentives already provided by Ukrainian legislation.
2. Attract long-term capital for their own development from pension funds through corporate bonds.
3. Create their own pension fund, attract voluntary and, subsequently, a portion of mandatory pension contributions, and participate in joint investment projects with foreign investors, communities, and the Government of Ukraine.

Pension savings are precisely the area that provides a win-win result: critically important social impact and the resilience and development of businesses, communities, and the state. That’s why Ukraine should maximize all opportunities in this area.