Pension insurance with a pinch of politics

Pension insurance with a pinch of politics

Deteriorating demographics pose a significant long-term challenge while systemic problem in the sector remain unaddressed

94 views

© Nadezhda Chipeva


With its size, the private pension insurance sector attracts political appetites. For example, in 2010 and 2014, ideas were floated at a high level in government to nationalize it. Though they didn't come to pass, in 2015 people were given the option to back out of private pension insurance funds. In this case, the premiums accumulated up until that point would be transferred to the National Social Security Institute (NSSI).

The NSSI covers pension payments with deductions from the current labor force, it chronically operates on a deficit, and is co-financed by the state budget. According to NSSI's estimates, deteriorating demographics will worsen the deficit both in nominal terms and as a percentage of GDP, which will make it increasingly difficult to pay adequate pensions.

Also, pension funds are often attacked for their fees and results. In general, the accusations are that real profitability is too low. Some estimates suggest that it may not even cover the cost of inflation. Pension companies themselves dispute the estimates, but the accusations lead to public pressure on companies to lower their fees.

Another systemic problem in the sector is that half of the companies operating in pension insurance belong to local economic groups. Over the years, they have consistently invested a significant share of the money of the insured in shares and bonds of companies related to their own group, bypassing existing restrictions on such practices in the Social Security Code. This poses a number of risks ranging from conflicts of interest to an outright draining of funds, which, although known for more than a decade, has not been addressed adequately by regulators.

With its size, the private pension insurance sector attracts political appetites. For example, in 2010 and 2014, ideas were floated at a high level in government to nationalize it. Though they didn't come to pass, in 2015 people were given the option to back out of private pension insurance funds. In this case, the premiums accumulated up until that point would be transferred to the National Social Security Institute (NSSI).

The NSSI covers pension payments with deductions from the current labor force, it chronically operates on a deficit, and is co-financed by the state budget. According to NSSI's estimates, deteriorating demographics will worsen the deficit both in nominal terms and as a percentage of GDP, which will make it increasingly difficult to pay adequate pensions.

By using this site you agree to the use of cookies to improve the experience, customize content and ads, and analyze traffic. See our cookie policy and privacy policy. OK