Azerbaijan pension project doomed to fail without 'mandatory element'
One of the foreign experts in the EU’s twinning project with Azerbaijan to set up funded elements in the pension system has voiced concerns over the sustainability of the exercise.
Dace Brencēna, chief executive at SEB’s Latvian pension fund, told IPE the project was “on time and on track”, with a legal framework for the new pension system already being drafted.
However, she also voiced concern that the funded elements introduced might “not grow very fast to begin with because they are purely voluntary”.
“It will take some time – especially in Azerbaijan, where long-term savings are not that well known, where even life insurance contracts are only tax-incentivised for three years,” she said.
In 2013, Azerbaijan and the European Union signed agreements for a twinning project, funded by the EU, to establish a funded non-state second pillar.
Azerbaijan aims to develop a funded element within the national pension system and promote a market for private pensions through the creation of a legal framework for non-state pension funds.
Latvia and Germany have been twinned with the country to “enhance capacity of the State Social Protection Fund of Azerbaijan (SSPF) to establish the regulatory, legal and administrative framework for the introduction of a funded element in the insurance-pension system and the establishment of non-state pension”, according to a 2014 mission statement.
However, Brencēna argued that the Azerbaijan government was “not ready to promise any contribution matching at the moment” but would would use tax incentives to get people to make additional payments to the state pension fund.
According to Brencēna, the SSPF will manage the assets in-house, which will make it the second major institutional investor in the country after the €27bn state oil fund.
As for the second pillar, providers will be able to set up pension funds as soon as the legal framework is finalised, which might happen by the end of the year.
Those funds will then be open to employers and employees – but again without a mandatory element.
Brencēna confirmed that all EU directives on pension funds would be included in the new Azerbaijan pension laws to make the system compatible with those in EU countries.
To learn more about the pension project in Azerbaijan, click here