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Last week, many Armenian officials, local and foreign experts gathered in the resort town of Tsakhkadzor to combine efforts to find solutions to the acute problems of the local stock exchange market amid introduction of a mandatory accumulative pension system in the country. Finance Minister of Armenia David Sargsyan, who also attended the conference in Tsakhkadzor, has kindly agreed to answer the questions of some media outlets. The minister’s answers to ArmInfo’s question are provided below.

  • by Elita Babayan

  • Wednesday, February 12, 23:20

 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!

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