EVERYONE GETS WHAT THEY EARN

One of the most sensitive aspects of social policy is the issue of pensions. In this regard, Azerbaijan is no exception. Targeted measures in the field of social security have made it possible to increase the average size of pensions in the country by 5.7 times from 2006 to 2013. The global crisis of 2008-2009 showed some changes in worldwide trends in the field of pensions. These changes concern, above all, increasing the age of retirement, as the cost of pensions became quite burdensome for individual countries in times of crisis.

At the same time, the need to bring the pension system of Azerbaijan in line with the ever-changing modern requirements requires further reforms in this area, which will increase the sustainability of the pension system. To determine the direction of reform, Azerbaijani President Ilham Aliyev approved the "Concept of reform in the pension system in Azerbaijan for 2014-2020".

In international practice, the funding of pensions is based on pension systems consisting of models of solidarity, accumulation, as well as their combination. The system of solidarity currently provides funding for the pensions of the older generation mainly from the social insurance fees paid by working persons. This process can be observed in Azerbaijan today.

In addition, many countries, along with the system of compulsory social insurance, are developing voluntary pension insurance as an additional component. This stage requires a higher development of the pension system, which allows you to earn an additional pension.

Serious problems that have arisen due to the depreciation of financial assets in the context of the global financial crisis intensified the use of models of solidarity on the one hand and the development of prefunded pensions on a voluntary basis on the other. Recent global trends in this area are aimed at strengthening the insurance principles in the public pension scheme at the expense of reforms to ensure the financial sustainability of the accumulated funds, as well as compliance with the actuarial fairness, which ensures proportionality between social insurance fees and pensions.

The pension system of Azerbaijan currently has a number of problems, at resolving which the measures outlined in the concept of reforms in the pension system are aimed.

One of the main problems is the lack of financial stability for a long period in the pension system in the current environment. Currently, some of the pension sums formed before 1 January 1992, when Azerbaijan began to enforce social insurance legislation. As a result, unsecured financial obligations formed in the pension system, which led to an increase in the financial burden of the system, and this helps a growth, even though insignificant, in transfers from the state budget to the State Social Security Fund to ensure sustainability.

In particular, from 2006 to 2014, the revenues of the SSSF budget increased 5 times - up to 2,928.5m manats, while transfers from the state budget to the State Social Security Fund - 6.8 times up to 1.142bn manats. Overall, transfers from the state budget in 2014 will cover 39 per cent of expenses of the Fund, while in 2006 the figure was 28.3 per cent.

Another outdated aspect, according to the SSSF, is the application of the principle of the basic labour pension. According to the current system, only half of the social insurance fee is used to form the future pension of an employee, while the other half is used to finance the basic pension. The result is workers who have been paying higher social insurance fees for a long time indirectly subsidize the future pensions of those who worked for a shorter period and paid less social insurance fees. As a result, this reduces the interest of persons with higher wages in paying social insurance fees.

In addition, the SSSF again raises the question of the need to improve the structure of the social insurance rate. Under the current system, the employer pays 22 per cent of the 25-per-cent rate from the salary fund, while only 3 per cent is withheld from the employee's earnings, and this leads to the fact that sometimes it is advantageous for the employer to understate the payroll to pay less for social insurance. Therefore, in the medium-term a decision is likely to be made to revise the structure of the rate for compulsory social insurance while maintaining its level. This will reduce the burden on employers and increase the burden on the payer of social insurance fees. The higher the salary, the more will be withheld for social insurance from the salary of the employee. This will support the interest of employers in raising the wages of their staff as it does not lead to an excessive growth in spending on social security payments to the SSSF.

According to the SSSF, in Azerbaijan there are a number of factors that negatively affect the solvency of the pension system. First of all, the current level of correlation between workers who pay social insurance fees and pensioners is unsatisfactory.

Currently, the total number of pensioners in Azerbaijan is 1.28m, while the number of those paying social insurance fees is 2.7m people. As a result, there are about 2.1 insured persons for every pensioner. At the same time, half of the 2.7 insured persons (about 1.4m people) are employed and pay social insurance fees in the amount of 25 per cent of their salary. Others work on an individual basis and pay the insurance fees at a lower norm - from 2 to 50 per cent of the minimum monthly wage. The result is a burden on the pension system in terms of the principle of solidarity.

The concept for 2014-2020, according to its authors, will ensure the financial sustainability of the pension system in the long-term. One of the areas of reform will be the change in the practice in which the insurance fees paid by individuals with high wages were used to pay the pensions of low income individuals. Employees paying a larger amount of the insurance fee during the period of employment will have an adequate replacement rate and should expect a high level of pensions.

In addition, it is planned to restructure the basic labour pension. As a result, the individual account will receive not half, as it is today, but the full amount of the insurance fee paid. Also, an index of the minimum pension in relation to the length of service will be enforced. For those whose social insurance fees cover the minimum pension, the rate of seniority will lose relevance. And employees with low payments will need some work experience for retirement. The indexation of pensions and their increase will be carried out as a whole, without dividing the basic level and the funded part.

As already mentioned above, the rate of social insurance fees will also be revised, and the payment potential of the pension system will be strengthened by optimizing the correlation of the number of those who pay social insurance fees and the number of pensioners.

One of the key aspects of the reform will be preparations for the introduction of the voluntary savings of pensions and the development of private pension funds (PPF).

It is extremely difficult to achieve a high pension using only the system of compulsory state social insurance. The use of voluntary insurance along with state insurance creates conditions for increasing the size of the pension. In turn, voluntary social insurance dictates the creation of PPFs, and it requires a more developed financial market in the country. In Azerbaijan, there has been talk about the need for PPFs for several years. The global crisis and the negative experience of a number of countries, including neighbours of Azerbaijan, showed that the activity of PPFs to invest funds should guarantee the safety of people's savings to the maximum.

It should be noted that the main phase of the preparation of legislative initiatives to ensure the implementation of all these reforms should be prepared in 2014-2015.

However, the regulatory framework for regulating the establishment and activities of non-state pension funds in Azerbaijan will be prepared later - in 2015-2017. In the future, Azerbaijani citizens will be able to choose how to use some of the savings formed by compulsory social insurance fees.

In general, the concept includes the latest trends in the pension system existing in the world. However, coordination with other government agencies and the implementation of a number of major tasks will be required to achieve these goals. Among them is the legalization of wages. Today, the Ministry of Taxes and the Ministry of Labour are carrying out work to legalize labour contracts. But this is only half the job, as the labour contracts must indicate the real wages of employees. This will provide a large inflow of funds into the SSSF and improve the financial stability of the pension system.

In addition, it is necessary to develop the financial market and create conditions for investing some of citizens' pension funds directed into accumulation. Without the development of the financial market, the activities of private pension funds will be severely limited, and it will be difficult for them to earn money for their clients. Therefore, the reform of the pension system of Azerbaijan is one of the steps towards the development of the financial market.