New Pension Plan Update: 42,000 State Workers Withdraw
In January 2019, a new law came into force that changed the way Georgia’s pension system operates. The long-awaited change aimed to increase retirement security for Georgians by providing pension payouts that are more in-line with the earnings made in their working years. The new pension scheme takes a percentage of workers’ pre-tax salary, improving financial support for retirees, and further developing the Georgian capital market through a pension fund investment team.
In the first phase of the new pension system, which started from January 1, all people working in Georgia under the age of 40, apart from self-employed people, were automatically enrolled into the new pension scheme. Workers 40 years and older and self-employed people were offered voluntary participation. To combat criticism and backlash over the automatic enrollment component, employees over the age of 40 were given the opportunity to opt out of the program starting in June of this year, receiving the pension contributions made on their behalf for the first half of the year.
New data released by the State Pension Agency shows that 148,942 Georgians took advantage of the offer and left the pension scheme in June. Of those, 41,805 (28%) were government officials, and 107,137 (72%) were private sector employees. The initial enrollment figures showed that about 25% of participants worked in the public sector, demonstrating a slightly higher than proportional opt-out rate for government employees. Nearly 40% (294,852 people) of participants are over the age of 40, and thus eligible to opt-out of the scheme.
“A total of 856,005 citizens have joined the pension scheme since January 1, 2019. The pension agency analyzes the engagement and withdrawal indicators…over the past two months, applications for withdrawal have shrunk 10 times,” said the State Pension Agency.
On the technical side, the new pension system works as a three-party investment scheme: employees contribute 2% of their pre-tax salary, the employer contributes an amount equal to 2% of the employee’s pre-tax salary, and the Georgian government contributes an amount equal to 2% of the employee’s pre-tax salary. If an employee’s salary is greater than 24,000 GEL ($8,888) per year, the government contributes only 1%, and if an employee’s salary is greater than 60,000 GEL ($22,222) per year, the government does not contribute at all. The self-employed can participate with a 4% personal contribution.
When Georgians reach the official state retirement age – 65 for men and 60 for women – they will gain access to their pension funds, distributed in monthly installments. The new pension scheme will not affect the current system, only supplement it, by which every retired Georgian is eligible to receive 200 GEL ($75) a month – a rate which increased by 20 GEL from January 1.
In the first quarter of 2019, in the first three months of the program, 747,774 people enrolled in the new accumulative pension system, contributing approximately 175 million GEL ($64.8 mln) to the fund, including interest.
In the beginning of June, the Pension Agency announced it had selected the five members of the investment board who will be responsible for determining the investment policy of the Agency over the next five years. These members are responsible for developing an investment policy document to be submitted to the Pension Agency Director for approval, modifying investment policy documents, quarterly monitoring and evaluation of all pension investment activities, assessing the compliance of investment activities with the investment policy document, and selecting specialized depositors and asset management companies. The all-male board members are: Timo Viherkenttä, Executive Officer of the Finnish State Pension Fund, Michael Ridley, adviser to the Finance Minister of Iceland and former Deputy Director of J.P. Morgan's London representation, Davit Tsiklauri, former Chief Financial Officer of the Bank of Georgia, Olivier Russo, Director of the Investment Fund of the Pension Agency of France, and Jean-Frederic Paulsen, an adviser to five successive Ministers of Economy and Sustainable Development of Georgia, including current minister Natia Turnava.
The State Pension Agency announced on August 6 that 273 million GEL ($93.3 mln) had been contributed to the fund so far. The pension funds will be invested domestically, doing double-duty – providing better retirement security for Georgians, and helping to further develop the national economy. Currently, participants are only able to select a low-risk portfolio, but after the first five years of the program, participants will be able to select between three types of portfolios to send their investments – low, medium, or high risk. Investment activities are expected to begin in the coming months, once the selected board members are confirmed by the Georgian Parliament.
By Samantha Guthrie
Photo: GzaPress