Georgia’s ruling party has passed yet another controversial legislation that stokes fears about the citizens’ pensions of hundreds of millions of GEL. The amendments to the “Law on Funded Pension” were passed in its third and final reading today, June 27, with 75 votes in favor and none against. Most opposition parties did not participate in the vote, as they are boycotting parliamentary work after the passage of the foreign agents law.
The controversial amendments were criticized by a number of opposition leaders and President Salome Zurabishvili from the moment they were introduced by the Ministry of Economy.
“The government is starting a new gamble,” Roman Gotsiridze, MP for the Euro-Optimists parliamentary group, was warning against the amendments in early May. In early June, President Salome Zurabishvili also called the amendments “malicious,” vowing to abolish them along with other Russian-style laws if the Georgian Charter she initiated succeeds in upcoming elections. Nika Gvaramia of the opposition party Ahali even called the amendments a “pension thieves'” law.
The package goes beyond just renaming the Pension Agency to the Pension Fund, with changes that critics say raise significant concerns, including increased government control over the institution and the potential risk of citizens losing money they are supposed to get back in retirement.
Increased Government Control Over Pension Fund Management
The declared official aim of the package is to refine and make more effective the governance system of the Pension Agency by centralizing power in one body.
Previously, the Agency was governed by two boards: the Investment Board and the Supervisory Board. The Investment Board had four members, all international, appointed by the Parliament, and was responsible for developing and implementing investment policy. The Supervisory Board consisted of the Ministers of Economy, Finance, and Health and the Chairman of the Investment Board and was responsible for overseeing the work of the Pension Agency, with the exception of investment policy.
The legislative package abolished these two bodies and created a single body, the Governing Board, in their place. The Governing Board will consist of nine to 15 members and will have a full control over the Pension Fund, including on the investment policy. The members will not be Ministers or political figures, will not be international citizens and will all be appointed by the Prime Minister of Georgia, thus minimizing the role of the Parliament in the Pension Fund.
The Ministry of Economy explained the centralization of powers in a single body was necessary due to the “significant growth of pension assets and the diversification and expansion of investment instruments” that require stronger and more effective management. It said that the centralization aims at increasing the effectiveness of risk management and supervision of pension funds. In addition, Irakli Nadareishvili, Deputy Minister of Economy, said that in the new system, the participation of Ministers and political figures will be excluded. Levan Surguladze, a financial expert and former director of the Pension Agency, also welcomed the merger of the two boards into one: “Two different boards were completely unintegrated governance structures that caused a lot of problems,” he said.
Meanwhile, the critics of the package fear that granting the PM the authority to approve members of the new Governing Board – which will have combined powers resulting from merging the two abolished boards – increases government’s control over the Pension Fund and put citizens’ savings at risk. “After the bill is passed, the members of the board will not be foreigners. Therefore, the government will take full control over the [Governing] Board,” wrote Khatia Dekanoidze of the Euro-Optimists parliamentary faction. “While the people and the government cannot even agree on what development means, and public opposition to pseudo-development projects is growing, it is truly alarming that the government is now putting the security of our future at risk without our consent,” economist Ia Eradze said. She added that the government is expected to start investing pension fund money in infrastructure projects, such as the strongly opposed hydroelectric power plants (HPPs).
Pensions Expected to be Invested in Non-Financial Assets
The specific change that raises another concern is that the Pension Fund has been allowed to invest citizens’ money in non-financial assets of its choice. Citizens’ pensions are divided into three portfolios: low, medium and high risk, totaling GEL 4.9 billion (about USD 1.755 billion). The largest portion, GEL 4.8 billion (about USD 1.71 billion), is in the low-risk portfolio.
Previously, the Pension Agency was allowed to invest money from the low-risk portfolio only in financial assets such as corporate bonds, deposits, securities, and equities. From now on, the Pension Fund is allowed to invest up to 15 percent of the low-risk portfolio in “other assets,” which include non-financial assets such as infrastructure projects. This 15 percent amounts to GEL 720,000. The Pension Fund will need the approval of the National Bank to invest this money in such assets.
Under the past law, the Pension Agency could invest in non-financial assets only from the medium and high risk portfolios, with 15 percent and 20 percent of the money from these portfolios, respectively, allocated to such assets. The adopted law has raised these thresholds by an additional five percent, allowing 20 percent and 25 percent of the medium and high risk portfolios, respectively, to be invested in non-financial assets.
Allowing the agency to dispose of such a share of money in non-financial assets is feared by experts. “If the government has some big infrastructure project […] and makes a decision to invest this money [in them], since it is the long-term money, this carries risks because this money can be spent inefficiently,” Zurab Lalazashvili, the Governing Partner of audit firm BDO, told local business media BMG.” They want to invest more of the savings, which are supposed to ensure a relatively peaceful old age for our citizens, in risky projects,” opposition leader Roman Gotsiridze wrote, adding that the government could invest them either in large infrastructure projects, such as any HPP or even the Anaklia port, or in the ruling party’s affiliated companies.
Economy Minister Levan Davitashvili dismissed such fears, saying: “We cannot imagine that pension savings will be used to finance the state’s public infrastructure [projects].” However, he didn’t completely rule out the possibility of pension funds participating in the financing such projects: “In general, the participation of the Pension Agency in the financing of infrastructure projects is possible,” he said, adding that if such a case occurs, it must only “serve the best interest” of citizens’ pensions.
Citizens Barred from Transferring Assets to Private Companies
According to the adopted law, citizens will no longer be allowed to transfer their pension assets to private companies. The Ministry of Economy cited international practice and says that citizens’ choice to transfer their pension assets is often “inefficient”.
The decision has also been criticized by the opposition. Beka Liluashvili of the opposition For Georgia party argued that the Pension Fund faces a reputational risk, as many citizens would have preferred to transfer their pension assets to private companies. He claimed that the Pension Fund is restricting citizens’ freedom of choice by preventing them from transferring their assets to private companies.
Increased Corruption Risks
The law has also increased in the management fee for the Pension Agency from the current 0.5 percent, to up to 0.75 percent of total pension funds. The exact amount of this fee will be determined by the Georgian government. While the explanatory note to the bill asserts that the 0.75 percent threshold is in line with international practice, this aspect of the amendment has not escaped criticism. Opposition MP Roman Gotsiridze expressed concerns that by raising administrative and bureaucratic fees, the Pension Fund could become vulnerable to corruption.
Another Controversial Law
While these controversial legislative changes have not caused as much public outcry as the Kremlin-inspired Foreign Agents Law or the so-called Offshore Law, critics say the damage is significant and fear that Georgians’ pensions will not be managed effectively, but rather spent arbitrarily as the Georgian Dream government sees fit.
“In essence, this bill provides for the creation of a kind of state bank, it is no longer a pension fund. It is a state bank created with the savings forcibly collected from the citizens of Georgia. According to this bill, it will become the most risky financial institution. If it is enacted, we should expect that one day the pension savings of the population will simply disappear. Fundamental changes like these don’t just happen, and here the interests of the government, including corrupt interests, are revealed to use this money as they see fit…With these changes, the government will be able to manage the money of the pension fund in the same way as it manages the budget now,” says economist Akaki Tsomaia.
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