Interview with Pension Agency Chief Levan Surguladze
-Starting January 1, 2019, The Contributory Superannuation Scheme was launched in Georgia. What are the advantages of similar schemes, and why have we introduced a contributory pension system in Georgia at this specific time?
-I would ask why we have not we introduced this system earlier? We had to take this decision much earlier, and we would have a much better economy today. This reform focuses on two goals and benefits. In the long-term perspective, this reform should ensure a financially independent life during their retirement age. In the short-term perspective, for the first time in Georgia, large-scale investment capital will be created in the country.
We forecast the collection of about 1.5 billion GEL in two years, and 5 billion GEL in 6 years. 80% of these funds will work in the Georgian economy, that is, the accumulated financial resources will be invested in reliable financial instruments. Today, we lack similar instruments, because we have an undeveloped capital market. After we accumulate investments resources, the companies will be able to use this money for their needs, such as expansion, creating new job places. Consequently, they will have to become financial transparent, well-organized, audited companies, and ensure reliable financial instruments, where we will place all these components in a diversified way. This scheme will foster the creation of new job places, expand companies and their business, promote economic growth, increase salaries and social allowances. All these benefits will be attainable for everybody, if they participate in the contributory superannuation scheme or not.
-We can already talk about companies and citizens involved in the contributory superannuation scheme. How much interest are business companies showing, how many companies have already joined this scheme? How many citizens do you expect to engage in this pension scheme?
-As of February 18, we have registered 40,329 private companies, the majority of all active companies. At this stage, we have raised about 5 million GEL for the contributory superannuation scheme. We expect that about 500,000 personal pension accounts will open. And all these activities will take place during a month. This is much more activity than we expected, and we have optimistic expectations for the future.
-The success of the pension system reform depends on the quality of public trust, although we have many negative experiences in Georgia in terms of lost savings. How would you persuade citizens that their contributions are safe? How do you guarantee that the financial resources accumulated for 15-20 years will not be lost one day because of a wrong decisions?
-We understand that we have had a very bad experience. There were certain precedents, but 30 years ago. The failed precedents used took place 300 years ago and even 3000 years ago. Therefore, it will not be correct to reject this development. The pension fund will be based on the best western standards, including in regards to the administrative part of accepting and managing pension contributions, and implementing the independent and investment process.
We will set up an investment board in the near future. The board will be staffed with high-ranking and experienced specialists. One more independent structure will also be arranged – the Risks Control Structure, which will control each transaction. At the same time, under the legislation, pension contributions will be placed on individual pension accounts. The scheme participants are able to check how much money they have accumulated on their own accounts, where and in which investment portfolio these shares are placed, how this portfolio is structured, what is the value of these shares, and so on. These assets are safer than all other assets, such as apartments, vehicles, deposits at commercial banks. Pension contributions are not subjected to any enforcement mechanism, that is, neither court nor any other enforcement mechanism is applicable to the pension contributions, even if a person owes debts to a commercial bank, the government or any other body. This is the safest, untouchable and inheritable asset, under the basic law.
-Under the current version, citizens over 40 years old and self-employed persons are not obliged to participate in the pension system, and this category accounts for 60%-70% of the whole population of Georgia. What steps will the Pension Agency take to attract these citizens? Do you think the government should offer additional benefits to self-employed citizens to engage with the new pension scheme?
-Under the legislation, all citizens engaged in the pension scheme enjoy equal benefits. This means that a 2% contribution is paid by an employee, 2% contribution by an employer, and 2% contribution by the Government. This scheme is equally applied to all participants. The only thing that we should ensure is a valuable information campaign, so that every citizen realize and understand benefits of the contributory superannuation scheme. I think this component has a decisive role, and our citizens will join the scheme gradually, along with improving their perception. If you have a 1000 GEL salary, 2% of this sum accounts for 20 GEL and after taxation you would take only 16 GEL. If you direct this 16 GEL to the Pension Scheme, it will be transformed into 20 GEL, and this sum will be replenished by 20 GEL from your employer, and 20 GEL from the government. This means that you will get 60 GEL on your pension account instead of 16 GEL. This is a fourfold, and 275% proceeds from risk-free investment. This is an unprecedented opportunity to rapidly grow your savings. We should also take into account that these resources will be invested, and annual benefits will grow.
-There are a lot of successful and failed examples of contributory superannuation system worldwide. Which system is closest to the Georgian system, to draw parallels about how this process runs in other countries?
-The contributory superannuation system runs in almost all countries – the USA, Asia. The difference is that the pension contributions start from 8%-10% there, while in Georgia this amount is only 2%. Moreover, I could not find a country where the Government is involved in the process in this volume or more. In reality, you pay only 1.6%, an employer pays the same ratio, and the government allocates 2.8%. This is quite a generous donation from the government.
-Some economic experts have staged criticisms of the investment component. They say that the pension agency should not invest funds in state securities. What would you say in response? What is the international experience in this respect, and is it possible to direct the accumulated funds into state bonds?
-Investment portfolios must be maximally diversified. This means that pension contributions must be invested in reliable financial instruments, and they must be directed to various assets, including to state T-bill obligations, Georgian state bonds, bonds issued by international finance institutions, including into EBRD GEL-denominated bonds. These resources may also be invested in bonds of such Georgian companies as TBC Bank, Bank of Georgia, Electrosystem, Georgian Railway. We have a wide variety of options. In the first 5 years, we will create low-risk portfolios, and the accumulated resources will be placed in similar bonds. Doubts and questions, as if these resources were to be be invested in state T-bills, are ungrounded.