Central & Eastern Europe: A progressive step
The Caucasus nation of Armenia has taken a very international approach to setting up a funded second and third pillar, writes Barbara Ottawa
Like other governments planning to introduce a multi-pillar pension system, Armenia’s looked at the reforms of several countries. But in the end it decided to go for the Estonian system as a blueprint. It was the successful reforms implemented in Estonia which inspired the Armenian government to take a closer look at their vision on reforms, says Mher Abrahamyan, head of the financial system regulation department at the Armenian Central Bank.
The system that was eventually established has its own distinct features, but the design of centralised administration of the second pillar was based on the Estonian experience, according to Abrahamyan. Indeed, the IT-system that will now run the second pillar in Armenia, the Armenian Mandatory Pension Information System (AMPIS), was developed by the Estonian Central Securities Depository.
Consulting and technical assistance came from the US Agency for International Development (USAID) through its three-year Pension and Labour Market Reform (PALM) programme, which concluded in 2012. A working group composed of both Armenian and international experts helped the authorities to draft sub-laws for the umbrella law on funded pensions.
Once the groundwork for the multi-pillar pension system was put in place, the government looked abroad for private companies to manage the assets that will now accrue in the second and third pillars.
Initially, two companies were commissioned – the Franco-Armenian joint venture between Amundi and ACBA-Credit Agricole Bank, which created Amundi-ACBA Asset Management, and the German-Austrian joint venture C-Quadrat Investment/Talanx Asset Management which has also set up a local subsidiary.
Vienna-based C-Quadrat, in which Germany’s Talanx Asset Management is the largest single shareholder, has sent Armenian-born board member, Arman Vardanyan, to head operations in the country.
“On transforming the pay-as-you-go system, the Armenian authorities were looking for international companies with experience in managing pension assets to help establish and manage the system,” Vardanyan explains.
Vardanyan adds that the almost 3m Armenians are awaiting economic change in a country that is still quite poor. He describes the reform as a “very progressive step of the government”.
The reform was passed by the Republican Party of Armenia, which gained a parliamentary majority in 2010, when the law on pensions was passed. This majority was confirmed in the 2012 parliamentary elections. However, some opposition parties are against the reform.
Günther Kastner, who will be supporting the running of the C-Quadrat Investment/Talanx Asset Management subsidiary, confirmed the selection of the international asset managers by the Armenian government had been “very transparent”. He also notes that the co-operation with the Armenian Central Bank has been highly professional.
Since the beginning of this year all those born on or after 1 January 1974 have to choose a fund in the mandatory second pillar. Both licensed companies will be offering three funds with distinct risk profiles – a balanced fund in which the total exposure of equity securities and derivatives based on this asset class may not exceed 50% of the fund’s assets, a conservative fund with a maximum equity share of 25%, and a fixed-income fund, which may not invest in equities or equity-related securities at all.
The Armenian Central Bank expects pension assets to grow to €2bn by 2020 given the mandatory employee contribution, which will see 5% of gross salary transferred to their selected fund.
The state then adds the same amount capped at AMD25,000 (€46); the average monthly income stood at AMD139,000 in early 2013.
Those who do meet the above-mentioned age criteria can opt into the second pillar, but their contribution will not be topped up by the state and they cannot opt out again at a later stage.
According to the law governing the new structure, funds will have to invest 60% in local
securities. “These will be mainly Armenian government bonds to begin with as they are available in sufficient numbers and the market is liquid,” says Vardanyan. He adds that there will also be “a tiny part in local corporates and equities” in the initial portfolios. “The government is relying on us and the other asset manager to develop the local capital markets and set up new funds,” he said.
Both the Amundi and the C-Quadrat subsidiary will also offer voluntary third pillar funds, with the choice of defined contribution, defined benefit and bank deposit options. Abrahamyan emphasises that there is no age restriction for participation, nor any restriction on contributions to the third pillar.
In addition, employers will also be able to set up additional pension plans for employees using this system. “Contributors to the voluntary funded pension system may include not only natural persons, who contribute for themselves, but also third persons, including employers,” Abrahamyan notes.