Wednesday, February 12 2014

 Mr. Minister, many experts in the equity market and ordinary citizens
are concerned over ‘silent’ policy of the two managing companies selected by
the Armenia Government. They do not say a word. Meanwhile, people expect them to explain their
vision of the problem in the press. The relations of the Government and these
funds are not clear. There is an impression that the Government does not allow
them to start a dialogue with the population concerned. The principle “Money rides
on silence” seems inappropriate for the given situation, at least, because it
is “our money.”  

 

 

Every participant of the accumulative pension system is free to choose a
managing company independently i.e. to make a conscious choice. Meanwhile, the
managing company must not know whose savings it is managing. Therefore, a fund
manager must be selected through pension fund account operators  (four banks and the national postal operator
–ed.). This mechanism is not our invention. The accumulative pension system is
based on the given principle worldwide. It helps avoid infringement of
pensioners’ rights and protects their right to reliable information on pension
funds. Here is how these two operators were selected. The Central Bank of
Armenia announced a contest and selected 15 world-known companies. Afterwards,
the Government sent relevant cooperation proposals to the selected companies
and some 7 or 8 of them expressed readiness to cooperate. The Government has
shortlisted the two most reliable and experienced ones. The Government made its
choice basing also on such criteria as the pension assets management model
practiced by the companies, the yield they are able to ensure and efficient
risk management policy.

 

As for the “silent” policy of the managing companies, I have to disagree
with you.  I selected my pension fund basing
on the benchmark of the companies, which was enough to make a choice.

 

Ordinary people hardly know anything about benchmarking. The meaning of
this expression is not familiar even to the graduated students of economic
universities of Armenia, I promise you.

 

 

If would be good if you could address your claims to the heads of the
managing companies. The Finance Ministry is not supervising the pension assets
management field. One of the ministry’s major tasks is to control over
investment policy of the funds. All the pension contributions of the employed
citizens will be transferred to a single account that has been opened at the Finance
Ministry. Afterwards, the Ministry will verify the reports of employers and
transfer the pension contributions to the personal accounts of future
pensioners.  The Central Depository of
Armenia keeps the register of those accounts. The Ministry is responsible for
the activity of the guarantee fund but never for the PR policy of the managing
funds.  

 

 

They have probably made a cartel agreement to divide
the market 50/50. This silence arouses concern of our citizens over possible
scattering of their pension assets not only in such economic force-majeur
situations as hyperinflation or default, but also because of their depreciation
along with economic stagnation. These concerns are hypothetical, but economically
substantiated and are connected with the long-term effect of the pension
reform.  The result of the ongoing reform
will become visible in forty years…

 

 

In the Soviet Union, our parents used to keep their savings at the
savings banks of the Soviet Union. As you know, all their savings depreciated.
Therefore, our citizens need confidence that they will not lose their
retirement savings.  Well, today’s system
differs fundamentally from the one we had in the Soviet Union.  Today’s system cannot collapse without a
reason. No one is going to lose his retirement savings.

 

You mean savings in the national dram…

 

 

No matter whether it is national or foreign currency, our future
pensions will be saved on the accounts of the managing companies.

 

The funds will be saved on personal accounts, but managing companies
will manage our savings…

 

 

That is not the point. All our savings will be invested in assets, bonds
and a great variety of other securities throughout the world. If an economic
crisis happens in any country, including in Armenia, it does not mean that the
crisis will hit all the others as well.

 

 

Your remarks are relevant for the part of savings (40%) that will be
invested in the securities of foreign companies and governments. Meanwhile,
within the coming few years most of the retirement savings will be invested in
local treasury bonds. The latest global financial economic crisis amid
financial meltdown and closure of many ‘highly reliable’ western emitters makes
our population think twice about their savings.

 

 

These are your personal assumptions. Actually, a very complicated risk
management mechanism has been developed under the investment policy of the
managing companies. This means that pension assets will be invested in our
government securities, bonds of foreign countries, securities of local and
foreign private companies. If any of the emitters is near default, hundreds of
others will experience growth. Our retirement savings will be scattered only in
case of a global collapse.

 

 

Don’t you think that a 5% pension contribution is a tangible amount for
our citizens? This percentage is lower even in some developed countries.

 

 

The given percentage is based on the long-term outlooks of economy and
serious mathematical calculations. The Government has set a goal to increase
pensions to 40% of the average salary. The second goal is to have pensions
higher than the minimum consumer basket. All this requires at least 5% of
pension contributions.  There is no
reasonable alternative to saving your future pension. We cannot up and increase
the income tax like France.

 

The living standards in France are quire different…

 

The citizens of France pay high taxes and receive high pensions. Would you agree to pay higher taxes? I wouldn’t agree to that. And many others would not do either. How can we pay higher pensions
without increasing the tax burden?  It is
impossible. Population is aging in Armenia like in Europe amid falling
birthrate. It is neither a new nor a ten-year-old phenomenon. After the WWI,
there was a baby boom. However, in 1970s birthrate slumped in Armenia.  This is why we have such misbalance of
employees and pensioners now. We have nearly equal number of employed
population and pensions, while the ideal ratio is 3 to 1. The only way out of
the situation we are in is the pension reform. If we refuse it, Armenia like
many other countries will face financial collapse in 10-15 years.

 

 

Big pensions can be guaranteed only in case of a dynamically growing
economy, new jobs, birthrate stimulation etc. I can list, at least, 100 factors.
A question arises as to whether the incumbent or future government is able to
guarantee a real economic growth for many years. Crises are inevitable. After all, we know about a theory of cyclicality.

 

 

Pension reform guarantees economic development.

 

If is properly organized…

 

The world’s greatest minds worked on it.

 

What do you think about the fact that some countries with accumulative
model of pension system suffer difficulties with pension payments now? They are
reluctant to spend budget funds to pay pensions. Look at Uruguay.

 

 

You are bringing the example of a country that failed the pension
reform, but you don’t speak of the reasons of such outcome. Some countries
failed the reform after the pension contributions were reduced under public and
political pressure. Others failed as civil servants and militaries received
several times higher pensions than the citizens working in the private sector.
Every country has a certain problem that predetermined the failure of the
reform.

 

 

As to problems, Armenia has enough…

 

It is impossible. We have developed the model of the accumulative system
in cooperation with the best specialists in the field from many countries. This
helped us take into account all the possible mistakes and risks.

 

 

These 5% contributions may negatively affect the consumer demand.

 

 

This will not happen because salaries in Armenia are indexed.

 

You mean salaries of civil servants, don’t you? The government does not
pay extra for the pension contributions to the private sector.

 

I mean the salaries for both the civil servants and the people engaged
in the private sector. Back to the question about the possible decline of
consumer demand, we have to choose the most effective model of economic growth
in the long-term outlook. We should choose between consumption level and
investments in economy. There is no institute of long money in Armenia yet and
the second model of economic development has not been practiced in the country.
Instead, the economic growth depended of the growth of consumer demand. Now about
the features of the pension reform: we redirect part of our finance to create
an institute of long money that will ensure a sustainable economic growth in
the long-term outlook. We would like to take mortgage loans for a period of 20
years at 5% or 7% annual interest. Where we can find a source of financing?

 

Can’t we reduce at least the country risk?

 

 

How? We still lack sources of long-term financing and the pension reform
is the only mechanism that will help settle that problem. If we fail to create
an institute of long money in our country at the expense of our wages, we will
never manage to build a sustainable, developing economy. Do you want to receive
as much pension as you parents do? I don’t want to.

 

 

No one opposes the reform, but it is absurd making it now amid
stagnating economy and industrial production, labor migration and brain drain,
when thousands leave the country every month.

 

Armenia’s economy is not stagnating; it is growing. Industrial growth
has gathered pace over the last four years. Look at statistics.

 

What do you mean speaking of industry?

 

Metal industry, for
instance.

 

 

It is nothing but ore recovery. The ore price began to increase after
the crisis-induced decline. This was reflected in the statistics. Even in the
field of metallurgy, we either sell ore or press customer-supplied raw
materials, at best. 

 

I will continue the list. We process agricultural produce, manufacture
pharmaceutical products. Export of drugs has been growing by 30% per year over
the last 3 years. Look at lest at the brandy and wine-and-vodka production.

 

Experts in the equity market call it absurd and abnormal that the
government adds additional 5% to the pension contributions of every citizen and
then, actually, borrows these funds to issue bonds. Will it increase the burden
on the state budget?   

 

We invest part of these funds in the government securities, but this
part will be reduced in the succession time.

 

 

Armenia hosted a forum on the pension reform three years ago. Some
experts from Kazakhstan who also attended the event strongly recommended
Armenian reformers not to repeat Kazakhstan’s mistakes and do not link the
reform to the exchange market. Instead, they recommended directing pension
assets to the real sector.

 

 

What happened in Kazakhstan was absolutely different from what we have
now. As soon as we start financing separate investment projects in the real
sector, our so far low diversified savings will face high risks.

   

 

Investing in securities is also risky. Both the local and foreign
experts still try to guess what will be with the pension assets of the people
who retire in the period of a crisis.

 

 

This is, perhaps, the problem number one. Although, default of our
savings in the long-term outlook is impossible, in the short-term outlook we may
face a situation when the citizens retiring in the period of a crisis will
suffer losses.

 

What will happen to them?

 

This is why we need a guarantee fund. This fund will recompense their
inflation losses in summary.

 

Nevertheless, covering only official inflation is not fair when it comes
to a country as poor as Armenia, where vital goods cost 80% of a family budget…

 

I assure you, all this is considered in the consumer basket.

 

Thank you!