"By itself, the State Social Protection Fund (SSPF) is not able to provide pensions that will ensure a decent standard of living in the current economic conditions"

The budget of the UniSuper Australian Pension Fund, which has more than 615,000 clients (members), is $135 billion. UniSuper was created in October 2000 as a result of the merger of the Australian Universities Scholarship Program (SSAU) and the Higher Education Scholarship Program (TESS). It is a non-profit company with 37 Australian universities as shareholders.

It was just an example of an independent social security Fund in a country with a population of just over 21 million people.

There is no need to talk about private social protection funds in Azerbaijan. Because there are no such funds in Azerbaijan.

As for the activities of the Social Protection Fund of Azerbaijan, as of January 1 of this year, 1 million 96 thousand pensioners were registered in the Fund (1114.2 thousand as of January 1 last year), which is 10.8% of the country's population. The budget revenues of the State Social Protection Fund for 2024 were approved in the amount of 6,919,860 thousand manats, expenses - 6,919,860 thousand manats.

The minimum pension in Azerbaijan is 280 manats, the average monthly pension is 492.3 manats.

But how transparent is the state-owned Social Protection Fund in Azerbaijan? Why are not  private foundations being created in Azerbaijan? How is the money raised in the Social Security Fund distributed? What are the remaining funds spent on?

Economist Rovshan Agayev answers these and other questions from ASTNA.

* * *

Question: How do you assess the activities of the Social Protection Fund in Azerbaijan? Is there transparency and accountability? How much money is in the Social Protection Fund?

Answer: There are serious problems with accountability and transparency in the activities of the SSPF, especially in the budgetary and financial activities of the Fund. First of all, unlike the state budget and the State Oil Fund, the Accounts Chamber does not give an opinion on the executed budget of the State Budget Fund. Although, according to the legislation, both the Oil Fund and the Social Protection Fund are extra-budgetary funds, that is, state financial structures that have exactly the same legal status. In this regard, the exclusive approach of the Accounting Chamber to them is unclear. It should be borne in mind that the opinion of the Chamber on the executed budget is a mechanism that plays an exceptional role in ensuring transparency, information openness and accountability of financial institutions.

Secondly, there is the problem of making public information about the revenues of the State Budget Fund. Thus, the question of how much of the Fund's income is generated by private business and which is generated by the public sector is always ignored. Whereas data on the contribution of the private sector to the formation of financial resources of the pension system is information that think tanks and research institutes are in very serious need of.

Thirdly, information on the amount of pension expenses by type of pension (by age, disability and loss of the head of the family) is not disclosed.

Fourth, the amount of the median pension at the end of the year is not disclosed. Also, there is no information in open sources about the number of pensioners receiving pensions in various intervals, for example, in the amount of the minimum pension, in the range of 300-500 manats and, let's say, above 1500-2000 manats. 

Finally, both revenues and expenditures of the budget of the SSPF by region of the country are not disclosed, although from the point of view of public control, information of this type is extremely important.

Question: Where do the funds collected in the Social Protection Fund go? How do they defend themselves? Why aren't people notified about this?

Answer: You probably mean the free funds of the Fund. When revenues exceed expenses in the budget of the State Budget Fund, the remaining funds are formed as a reserve due to the budget surplus and, according to the law, these funds can be invested in various financial instruments in accordance with the decisions of the Investment Committee established in the Fund. These instruments can also be securities of the Ministry of Finance and the Central Bank, bonds secured by a state guarantee, repo and anti-repo operations on government securities, deposits.

Indeed, there is insufficient data on the management of real residual funds. At least the Oil Fund has experience in accountability for the management of funds, and this experience can be used. But, as we have already mentioned, the GFS generally has a problem of accountability and transparency. And this, as in budgetary activities, does not allow for information openness in the field of residual funds management.

It is obvious that transparency and accountability are important in the activities of the Foundation, the introduction of standards of information openness, and this issue can be resolved by adopting legal documents.

Question: Why in Azerbaijan, people who have reached retirement age cannot receive the accumulated funds in the Social Protection Fund at once? Or if a person who has not reached retirement age dies, why are not the funds accumulated in this Fund transferred to his heirs? If these funds are not transferred to the heirs, then what are they spent on?

Answer: This issue is being discussed very widely. I think the main reason for this was the government's transition from a mandatory collection model to a voluntary collection model. After amendments to the law "On Labor Pensions" were introduced in 2017, people were given the right to form savings funds for their future through voluntary contributions to social insurance. But there is no legal basis for this, and there are no private pension funds in the country that would manage savings. Currently, the contributions paid are accumulated only in the insurance account. This account, as the name suggests, is designed to insure the residence of elderly people.

The government's rejection of the funded pension model was not the right step, and even today it is possible to win back and collect a certain part of insurance premiums (for example, a fifth) at the expense of savings in the state pension fund itself. In this case, the funds accumulated in this account can be used by people either themselves or their heirs after a certain period as their own deposit.    

Question: Why is not the Pension Fund being reformed? Why aren't private foundations being created?

Answer: Although the creation of private pension funds has been included in 2 different pension strategies adopted by the Government over the past 20 years, this has not happened. In any case, if the Government had the political will and desire, this would be possible. One can only speculate about why there is no desire.

But one of the main reasons is that there are not some institutional prerequisites necessary for the functioning of private Pension Funds. For example, these funds do not have a broad base of policyholders who represent the private sector, acting as the main financial base. Currently, only about 40% of employees work in the private sector. In addition, the scale of illegal income and employment is extremely high, and in these conditions private pension funds cannot function effectively.

Another important reason is the absence of a competitive and healthy financial market.

In fact, the availability of free funds in a pension fund that is not based on an accumulation model is devoid of logic. Because pension funds around the world use only funds collected in savings accounts as investment assets. If a fund saves money collected from insurance premiums and creates a free balance, the only reason for this is that it does not provide people with a decent amount of pension at the level to which they are entitled.

Question: Azerbaijan has joined the European Social Charter since 2004. According to paragraph 4 of this document, the State is obliged to recognize the right of employees to be paid at a level that ensures a decent standard of living for employees and their families. Does the pension amount in Azerbaijan ensure a decent standard of living? What should be the size of a pension to ensure a decent standard of living? Will the Fund have enough funds to pay this amount?

Answer: A decent pension is an amount that allows pensioners to live a decent life without needing anyone else, or even their relatives. Unfortunately, out of almost 1.3 million pensioners in Azerbaijan, about half have a monthly pension of less than 360 manats.  If a living wage is established that meets the real needs of people, as well as the standards of the World Bank, then the current minimum pension (280 manats) will not even be enough to provide food for pensioners. It's no secret that the pension that older people receive will not allow them to do without family support. This fact confirms that there is no decent pension in the country.

The SSPF alone is not able to provide pension amounts that will ensure a decent standard of living in the current economic conditions. As already mentioned, for this it is necessary to eliminate illegal employment and income, the share of legal employment in total employment in the private sector should increase by at least 70-75%. The income base of the Fund is formed not by any orders and decrees, but by economic activity.

Question: What do you suggest? What steps should be taken to ensure that the pension fund is accountable, transparent and that the pension can provide a decent life?

Answer: First of all, the Accounting Chamber should prepare an opinion on the executed budget of the State Budget Fund, and this conclusion should be open for discussion in Parliament, as well as for the public.

Secondly, monthly, quarterly and annual comprehensive reports on the execution of the Fund's own budget should be published via the Internet. These reports should contain detailed information on both the sources of budget revenue generation, in particular on payments from the private sector, and on the amount of expenditures by type of pension, as well as on the amounts of income and expenses by region of the country.

As for the decent size of the pension, it does not depend directly on the activities of the Fund. This issue primarily depends on the insurance mechanisms and calculation methods chosen by the Government, the replacement rate and the level of wages in the country. If the chosen insurance model does not fully impose any restrictions on the accounting of earned funds when calculating a pension (for example, in practice we observed a 50% limit in 2006-2017) and a decent wage system operates in the country, then in this case the pension size is possible, providing a decent standard of living.