International Labour Organization Future of the Ukrainian Pension System Adequacy, Coverage and Sustainability SOCIAL PROTECTION DECENT WORK TECHNICAL SUPPORT TEAM AND COUNTRY OFFICE FOR CENTRAL AND EASTERN EUROPE Future of the Ukrainian Pension System Adequacy, Coverage and Sustainability ILO DECENT WORK TECHNICAL SUPPORT TEAM AND COUNTRY OFFICE FOR CENTRAL AND EASTERN EUROPE Copyright © International Labour Organization 2019 First published 2019 Publications of the International Labour Office enjoy copyright under Protocol 2 of the Universal Copyright Convention. Nevertheless, short excerpts from them may be reproduced without authorization, on condition that the source is indicated. For rights of reproduction or translation, application should be made to ILO Publications (Rights and Licensing), International Labour Office, CH-1211 Geneva 22, Switzerland, or by email: [email protected]. The International Labour Office welcomes such applications. 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Future of the Ukrainian pension system: adequacy, coverage and sustainability / International Labour Organization; ILO Decent Work Technical Support Team and Country Office for Central and Eastern Europe. -Budapest: ILO, 2019 Майбутнє пенсійної системи України: адекватність, охоплення та стійкість / Міжнародна організація праці; Група технічної підтримки з питань гідної праці та Бюро МОП для країн Центральної та Східної Європи. – Будапешт: МОП, 2019 9789220316283 (print) 9789220316290 (web PDF) The designations employed in ILO publications, which are in conformity with United Nations practice, and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the International Labour Office concerning the legal status of any country, area or territory or of its authorities, or concerning the delimitation of its frontiers. The responsibility for opinions expressed in signed articles, studies and other contributions rests solely with their authors, and publication does not constitute an endorsement by the International Labour Office of the opinions expressed in them. Reference to names of firms and commercial products and processes does not imply their endorsement by the International Labour Office, and any failure to mention a particular firm, commercial product or process is not a sign of disapproval. Information on ILO publications and digital products can be found at: www.ilo.org/publns. Printed in Hungary Cover photo© 2018 The Associated Press Contents Foreword .......................................................................................... v Summary ........................................................................................vii Introduction .....................................................................................1 1. Adequacy of old-age benefits in the Ukrainian pension system ..........3 1.1 Adequacy of old-age benefits based on international standards ....... 3 1.1.1 Guiding principles of income security in old age – Recommendation No. 67 ...................................................................................3 1.1.2 Minimum standards of old-age pensions – Conventions No. 102 and No. 128, and Recommendation No. 131 ........4 1.1.3 Basic income security and access to essential health care for all – Recommendation No. 202 .................................................................................6 1.1.4 Ensuring adequacy throughout the life by pension indexation ..................7 1.2 Assessment of the adequacy of old-age pensions in the Ukrainian pension system ............................................................... 8 1.2.1 Pension formula ....................................................................................................8 1.2.2 Retirement age and the required contribution period .............................. 12 1.2.3 Pension indexation ............................................................................................ 14 1.2.4 The minimum pension guarantee .................................................................. 15 1.3 Conclusions and recommendations .............................................. 21 1.3.1 Options to improve the adequacy of old-age pensions and enhance the minimum guarantees ................................................................................. 21 1.3.2 Concluding remarks ......................................................................................... 22 i FUTURE OF THE UKRAINIAN PENSION SYSTEM | CONTENTS 2. Coverage and compliance: the informal economy and undeclared work ................................... 27 2.1 Problem analysis .......................................................................... 27 2.2 Coverage gaps of the Ukrainian pension system ........................... 29 2.2.1 Coverage of insured workers .......................................................................... 29 2.2.2 Low labour force participation and high unemployment ........................ 30 2.2.3 Informal economy and undeclared work ..................................................... 31 2.2.4 Non-standard forms of employment ............................................................ 33 2.3 Conclusions and recommendations .............................................. 35 2.3.1 Measures to extend social security coverage in Ukraine........................... 35 2.3.2 Concluding remarks ........................................................................................ 37 3. Financing the Ukrainian pension system ....................................... 41 3.1 The current financial situation of the Pension Fund ...................... 41 3.2 Long-term actuarial projection results ......................................... 44 3.2.1 Initial remarks ................................................................................................... 44 3.2.2 Key results of the 2017 actuarial valuation by the Pension Fund ..................................................................................................... 45 3.3 Conclusions and recommendations .............................................. 52 3.3.1 Financial and social implications of the status quo projection ............... 52 3.3.2 Need for exploring a wider range of policy options .................................. 52 4. The introduction of mandatory funded pensions: cautionary remarks ..................................................................... 55 Conclusions ................................................................................... 61 References ..................................................................................... 62 ii FUTURE OF THE UKRAINIAN PENSION SYSTEM | CONTENTS Tables Table 1.1. Comparison of benefit rates for a pensioner with a 30-year contribution period by different accrual rates ...............................................11 Table 1.2. Comparison of replacement rates of a model pension with a 30-year contribution period by different accrual rates and wage growth rates ...............................................................................12 Table 1.3. Eligibility conditions for old-age pensions ...................................................13 Table 1.4. Number of newly-awarded pensions by sex and contribution years, 2016–2018 ............................................................................................................14 Table 1.5. Number of newly awarded pensions by sex and contribution years, 2016–2018 ............................................................................................................16 Table 1.6. Comparison of the statutory and estimated subsistence minimums, 2015–2019 ............................................................................................................17 Table 1.7. Comparison of subsistence minimums, the minimum and average wage, and the minimum pension, 2015–2019 .......................20 Table 2.1. Number of pensioners by type, 2016–2019 ..................................................27 Table 2.2. Coverage of the State pension system, 2015–2018 ......................................29 Table 2.3. Formal and informal employment, 2017 ........................................................31 Table 3.1. Pension Fund budget of Ukraine, 2015–2019..............................................41 Table 3.2. Key financial indicators of the Pension Fund, 2015–2018 ........................43 Table 3.3. Key macroeconomic indicators, 2015–2018.................................................45 Table 3.4. Key economic assumptions, 2020–2050 ........................................................45 Table 3.5. Key demographic assumptions by three variants, 2020–2050 ...................46 Table 3.6. Projected population by sex and age group, 2020–2050 (low variant) ...................................................................................47 Table 3.7. Projected number of insured persons and contributors by sex, 2020–2050 ............................................................................................................48 Table 3.8. Projected number of pensioners by sex and type, 2020–2050...................49 Table 3.9. Projected average replacement rates by sex and type of pension, 2020–2050 ............................................................................................................50