DOI:  10.36172/EKONOMISTI.2022.XVIII.02.Natia.Sharabidze

Expanded Summary

The pension system, which aims to ensure adequate retirement income, fiscal sustainability of pension expenditures and an effective response to demographic change in the population, is the subject of active discussion in the developing countries of the world. In the wake of Georgia's economic development and deteriorating demographic situation, the need to modify and improve the pension system is, of course, becoming urgent.   

An ideal pension system is an important part of the state socio-economic policy. The goals of the pension system are: to ensure adequate pension income and fiscal sustainability of pension spending, which can be achieved by integrating an accumulative scheme into the system.

The accumulative pension system is fair, taking into account the contributions of citizens to economic development, as well as enabling them to plan retirement income independently. The new pension scheme is also effective as it allows savings to be invested more profitably. Pension funds provide investing contributions to get the optimal investment portfolio.              

Georgia has a new funded pension scheme based on the basic principles of the defined contribution (DC) scheme. Mandatory accumulative pension scheme has been operating in the country since the beginning of 2019 and is still a topic of discussion today.

The new pension system ensures the maintenance and growth of the purchasing power of the pension. As a result of the introduction of the accumulative pension scheme, Georgia's current pension system is hybrid one. This system comprises the universal pensions based on the principle of solidarity as well as the scheme based on contributions to individual accounts in pension funds, so pensions are paid from two different sources: the state budget and personal pension account. Retirement income depends on accumulated contributions, the investment returns earned by these contributions and work experience of the participants of the accumulative pension scheme. the government, employee and employer make a contribution of 2% of the employees' gross income to an individual retirement account. If the total monthly salary of the employee exceeds 60 thousand GEL, the government does not make any contributions.

Increased savings as a result of pension reform increases the country's investment potential and allows these resources to be used more profitably, thus the role of pension fund assets in the economic development of the country is great. At the same time, the increase in pension assets may lead to revision of the investment strategy and higher-level restrictions. The issue of profitable placement of assets is a challenge for pension funds. The main goal of pension fund investment activities is to obtain high real returns on pension assets through financially secure and well-diversified investments. Given this, investment portfolio management is one of the determinants of the efficiency of the pension system.

Pension reform in Georgia has created a large amount of free cash resources, which allows pension savings to be used to develop the capital market in the long-term. In turn, the development of the local capital market simplifies the process of investing pension savings in the local economy. The investment policy of pension funds around the world depends on the characteristics of the national economic environment and the economic situation of the country.

The article discusses the Georgian pension system, analyzes the main challenges of the system and development prospects, based on the results of the study of foreign experience. Accumulative pension funds operate successfully in many countries around the world including European countries: Iceland, Denmark and the Netherlands. An overview of the pension systems of these countries is presented in the following section of the article. The study also discusses the impact of the pension fund investment policy on the development of the capital market.

According to the Mercer CFA Institute, Iceland has the best pension system in the world. The country ranks high in the global pension index mainly because of good pension fund governance and offering significant benefits for retirees. The Icelandic pension system consists of three pillars: a tax-financed public pension, a compulsory second pillar and voluntary private pensions.

One of the reasons why the Icelandic pension system is highly successful is the size of total assets of pension funds - The amount of assets in pension funds are about twice the size of the country's economy. However, pension funds face asset allocation and profitability challenges.

In recent years, with increase in basic pension the replacement rate has also increased. Prior to the pension reform, retirees in Georgia were entitled to an old-age pension in the amount of 19% of the average salary. In international practice, a high replacement rate can be achieved under the accumulative pension scheme.

The results of the study of the pension systems of different countries show their importance while assessing the economic situation of the country. A well-functioning pension system provides adequate social protection to the retired population. However, the success of pension reform depends not only on the introduction of optimal pension schemes, but also on prudent management of pension fund assets.

The new pension system provides an opportunity to invest the accumulated funds profitably. On the other hand, the implementation of the funded pension reform is accompanied by significant investment risks. Based on the experience of foreign countries, governments will be required to take greater responsibility in defining long term investment strategies for pension funds. However current investment policy is optimal since funds are mainly placed into deposits that mitigates the risk of potential outflows.

The research confirms the importance of properly selected investment instruments. The investment policy of the Pension Fund of Georgia is especially important at an early stage of the pension system reform. In this case, selecting highly rated and low-risk commercial banks is essential.

Optimal regulatory norms, adapted to the local environment, introduced to develop capital markets in the country, will facilitate long-term investments by pension funds and further diversify the investment portfolio.  

In order to maintain the pension replacement rate and consequently the standard of living, it is important to encourage the implementation of private pension plans. Along with economic growth, there should be an increase in contributions to the fund. Pension can be considered optimal, when the replacement rate reaches at least 50%. Given the results of the study, this is not possible in two-pillar pension system. Therefore, encouraging citizens to participate in voluntary funded pension plans is expedient.