Issue 3, 2019. June-July



Georgia's newly created Pension Agency has accumulated 175 million lari since January, when the new mandatory pension law went into effect. Currently, 748,000 people are paying into the fund. spoke to the head of the fund, Levan Surguladze, about How the funds will be managed - and how the new law will help people save for retirement.

Nino Bakradze

- The Pension Agency was created to manage pension savings by investing them wisely. What strategy will the Pension Agency use to achieve its goals?

- In order to make investments, first we need to form an investment council. We have already announced vacancies... The parliament should confirm five council members. Later the council will appoint an investment officer, too. Simultaneously we are working to form a risk assessment department, which will check each transaction. We have only two months to form the council and the risk department. Meanwhile, we need to accumulate the proper amount of money to allow us to make low-risk investments. Later, beneficiaries will be able to decide if they want to make medium or high-risk investments with their savings.

- Will information about investments be public, at least for beneficiaries?

- Each participant of the fund will have access to information about the investments made with their savings on their personal accounts [in the pension agency system]. This data will be available on our webpage as well. Today savings are held in 10 commercial and national bank accounts. Right now the interest rate is seven percent, but after we make low-risk investments, we are planning to recive 8-10 percent rate.

- How can the pension savings be used, other than making investments?

- The law regulates this issue and we are not able to invest savings directly. That means we are not able to issue loans or become a shareholder in companies. The only thing we can do with this money is invest it into reputable and experienced financial institutes.

- Do you have a draft of the list of places where you will invest savings?

- According to the law, 80 percent of the pension savings should be invested in the Georgian economy, the other 20 percent can be invested in foreign financial institutions. The law determines the categories and assets where we can make investments and where we cannot. The investment council will prepare more detailed instructions about the investment procedures.

- What guarantees are in place to insure that the investments you make will generate a profit?

- Our main goal is to make low-risk investments and earn a secured profit. If we make a high-risk investment, profit will be higher but riskier. Investing the money wisely will be the main job of the investment council. They should control each transaction, assess the risks and make the right decisions.

- The devaluation of the Georgian lari is a serious problem. How could that affect the pension fund, especially when you invest pension savings abroad?

- Currently, the average inflation rate is three percent. Today our savings, which are placed in different banks, are earning seven percent profit, which covers inflation costs. Later, when we make low-risk investments, we are planning to receive 8-10 percent profit, which will cover inflation as well. If inflation increases and becomes 12 percent, then the profit rate will also increase and, in this scenario, we plan to earn an average 18 percent profit.

- The second most discussed issue in Georgian society has been the calculation method you used. You stated that the average annual growth of salaries was four percent. And savings were calculated based on this variable. How did you arrive at four percent as a salary growth indicator? What kind of methodology did you use? Georgians do not agree that their salaries are growing that fast.

- Average annual growth does not mean that a salary is growing by 4 percent every single year. For instance, your salary is 1,000 lari today and you have no growth for the next 3 years. But one day you get a different job and your salary increases by 100 lari. It means that your salary is growing and our calculation is based on this assumption. How likely would it be for a 20-year-old to maintain a 500 lari salary until retirement? This would be a very rare case and we did not take into consideration such exceptions. Since inflation is three percent, salary growth by four percent is absolutely normal. Our calculations are based on local and international experience.

- When are you going to pay pensions through the accumulated savings?

- Two weeks ago we had our first pension payout. This person retired three months after the [pension] reform started and we served him as the legislation intended. We do not have a complete analysis of how much our payments are as of today because we are still finalizing the number of participants. As you know, people over the age of 40 can quit the program. After that, we will make a report and publish it on our website too.

- You note that people over 40 can stop participating. How many of them are going to quit? What numbers do we have today?

- Right now we have over 287,000 beneficiaries over the age of 40, but we do not think that all of them will quit. We try to communicate with them very actively and inform them as much as possible about the social and economic benefits of this project.

- How do you communicate with them?

- Face-to-face communication is the most effective. We already met with dozens of large corporations and we have also held meetings in the regions, where we present our goals and plans through printed materials, TV and radio programs. In short, we use all possible communication channels and try to deliver as much information as possible to the public.

- Why should we trust this reform? Why will it makes people's lives better?

- This program should bring social and economic benefits to the entire country. Social benefits mean that people will live better after they retire, and that they will have proper savings and incomes. Our calculations show us that this is possible. In terms of economic benefits, I would say that this is the first time when we have such a huge capital base to help the Georgian economy to grow. 80 percent of these savings will be invested in Georgian institutions, which will allow people to create new jobs and receive better incomes. Such pension funds exist in every developed country and are very successful. The accumulative pension fund is the most protected asset a human being can have. A personal pension account is untouchable even if other accounts are frozen... If you rule out the apocalypse, a pension account is the safest.