Creation of the Accumulative Pension in Georgia

MG Law Office, through the contribution of partners Archil Giorgadze and Nicola Mariani, joined by senior associates Irakli Sokolovski, Ana Kochiashvili, Tamar Jikia and associates Ana Chikovani, Elene Samadbegishvili, and Mariam Kalandadze is partnering with GEORGIA TODAY on a regular section of the paper which will provide updated information regarding significant legal changes and developments in Georgia. In particular, we will highlight significant issues which may impact businesses operating in Georgia.

Background

These days, many developed and developing countries are in the process of transforming pension systems with the objective to address the issues of retirement income adequacy and financial sustainability more effectively.

In the last two decades, Georgia has been through multiple rounds of reforms of its pension system. Most important was the introduction of a flat rate pension in 1995. Another reform of the pension system commenced in 2004. Until 2004, state pensions were financed by the State United Social Insurance Fund (SUSIF) based on social contributions of employer and employee. However, from 2004, social programs became financed from the general budget revenues. Remarkably, from 2008 to August 2012, the pension amount included a long-service bonus distributed on top of the flat rate pension – for those with 25 years or more of working life, the bonus equaled GEL 10 per month. However, at the end of August 2012, pensioners stopped receiving long-service bonuses and instead received the combined amount as a flat rate pension benefit.

In light of the series of transformations of pension system in Georgia, the Ministry of Economy and Sustainable Development of Georgia (“MOESD”) created a Pension Reform Unit (“PRU”) with ultimate goal to design a pension reform strategy, which proposed mechanism for increasing the social pension (indexation) and the creation of a complementary pension system component – the contributory private pension model and prepare the relevant draft law on contributory pension model.

As a result of drafting activities of PRU, on 21 July 2018, the Parliament of Georgia adopted the Law on Pension Savings (the “Pension Law”). The goal of the Pension Law is to provide the citizens of Georgia with the opportunity to create the savings in proportion to the compensation earned under their employment and upon occurrence of the retirement age, receive the accumulated pension savings, thus ensure higher replacement rate for the citizens participating in pension scheme. The proposed private pension scheme envisages a 2%+2%+2% system for employed workers: each of the Government of Georgia, the employer and the employee will have to contribute 2% of the gross salary of the employee into the personal account of employee from each salary payment, i.e. in aggregate 6% of the amount of the salary payment. Notably, participation in such pension scheme is mandatory for all the employees under age 40 and voluntary for those who have already reached such age. Significantly, the Government of Georgia will be released from the obligation of making any contribution on behalf of those employees whose annual gross salary exceeds GEL60, 000, transforming the pension scheme formula into 2%+2%.

As forecasted by MOESD, introduction of the private pension system will gradually allow the social pension system to become a “pure poverty alleviation tool”.

The Pension Agency

Under the Pension Law, LEPL Pension Agency (the “Pension Agency”) will be a body responsible for overall administration and management of accumulative pension system in Georgia.

Main functions of the Pension Agency will include: (i) analysing the pension saving scheme; (ii) assessing the risks associated with the pension scheme used by the Pension Agency; (iii) pooling contributions received by the Pension Agency and adopting investment decisions in relation to the investment of the contributions.

Under the Pension Law, the above responsibilities of the Pension Agency will mainly be carried out through the Investment Board. The Investment Board shall: (i) draw up investment policy document defining investment strategy and principles used in course of adopting investment decisions related to investment of assets accumulated with the Pension Agency; (ii) monitor and assess all the activities related to the investment of the assets of the Pension Agency; (iii) developing proposals for the annuals expenses of the investment activities; (iv) select the companies managing the assets of the Pension Agency. Investment activities of the Investment Board will be regulated and supervised by the National Bank of Georgia.

In addition to the activities carried out by the Investment Board, the Pension Agency will be guided and supervised by the Supervisory Board. The responsibilities of the Supervisory Board will cover: (i) appointing the Chief Investment Officer of the Investments Board; (ii) determining and supervising the mechanism of internal auditor of the Pension Agency; (iii) approving the rules and conditions of payment of the pensions; (iv) elaborating the selection criteria and appointment of the director of the Pension Agency; (v) approving the charter of the Pension Agency; (vi) adopting the PR strategy of the Pension Agency; and (vii) carrying out independent audit of the Pension Agency; (viii) supervising any and all activities of the Pension Agency. Notably, the Supervisory Board will not be authorized to monitor the investment activities of the Pension Agency.

Impact of the Pension Law on Business

The Pension Law foresees certain obligations for the companies in terms of their status of employers. Under the Pension Law, companies are obliged to transfer 2% of the gross monthly salary of their employees to the pension fund and are responsible for being a payment agent for employees for the portion of the pension contribution to be made by the employees. Notably, in contrast with the employees, employers do not have freedom to opt out from the pension scheme – if the employee chooses to participate in pension saving system, the employer is automatically obliged to follow.

Does Mandatory Pension Contribution Qualify as a New Tax?

According to the Constitution of Georgia, a new type of common-state tax may be adopted or the upper limit of the current rate may be increased by a type of common-state tax only through a referendum. According to Georgian legislation, a tax is a mandatory, unconditional monetary payment to the state budget made by a taxpayer based on the necessary nonequivalent and gratuitous character of the payment. In contrast, pension contributions made to the Pension Agency do not belong to the state budget and will be returned to citizens at their retirement age. Thus, under the laws of Georgia, most likley pension contributions cannot be qualified as a new tax.

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Note: this article does not constitute legal advice. You are responsible for consulting with your own professional legal advisors concerning specific circumstances for your business.

MG Law is the first full-service law firm in Georgia to be founded by international partners. The firm advises a diverse group of Georgian and foreign companies, financial institutions, investment funds, governments and public enterprises.

Among many other areas, the firm primarily focus on the following sectors: Banking & Finance, Capital Markets, Arbitration & Litigation, Labor & Employment, Infrastructure and Project Finance, Energy Law, Real Estate, Tax and Customs, Investment Law, Corporate Law, Real Estate, Infrastructure & Finance Projects, and Cryptocurrency & Blockchain.

For more information, please visit www.mglaw.ge or contact Archil Giorgadze at archil.giorgadze@mglaw.ge and Nicola Mariani at Nicola.mariani@mglaw.ge