Following the break-up of the former Soviet Union, a newly independent Armenia chose the course of democratic development and European integration. Like other countries in transition, it faced the challenge of developing the complex of relationships and institutions intrinsic to a market economy. In particular, it needed to reform the system of social support inherited from the former Soviet Union, which was incapable of addressing the population’s fundamental problems and aspirations for social justice.

The social reforms conducted in Armenia have been inadequate thus far. The shortcomings in the social sector, which is still in the process of reform, are due to the deficiency of the legal and institutional base, as well as the absence of a proper monitoring system and analysis of social indicators that would enable the social consequences of reform to be properly assessed.

The current pension system does not yet provide for social justice and therefore needs to be brought into line with European standards. At present, social revenues in the republic are barely enough to pay the basic pension and some very low supplements for years of service. The basic pension and invalidity and unemployment benefits, as well as other state social benefits, are several times lower than the national subsistence minimum. As a result, pensioners, the disabled and the unemployed continue to be the poorest layers of society and with the least social protection.

Employers and employees lack incentives to make social contributions into the State social insurance fund. Even with the relatively high level of mandatory social contributions they are to pay (approximately 22% of salary in the case of an employee on an average salary and 20% of salary in the case of an employee on a salary double the average), the size of the monthly pension of an employee on an average salary is approximately 19% of salary, while in the case of an employee on a salary double the average it is only 9%. At the same time, the pension an employee receives does not depend on the amount of social contributions made by him or his employer throughout the period of employment. This exacerbates problems with ‘shadow’ employment and the non-disclosure of employees’ actual salary levels.

It is therefore essential that a system of individual accumulative accounts be first set up. This is considered one of the most important steps towards a new pension system anticipating the payments of pensions and tying these to accumulated social contributions (earnings-related pensions). This would also provide an important stimulus for employees and employers to make social contributions.

Armenia does not yet have a legal and institutional basis for private pension funds that could act as supplementary pension providers using mechanisms of voluntary accumulating pension insurance. At the same time, as in all developed countries, pension funds are important players in the financial markets and provide considerable investment capital.

Previously, there were objective reasons for delaying the introduction of such an important financial institution in Armenia. In conditions where the capital market is under-developed, where there is little variety in the financial instruments available for investment and risk diversification, and where the state lacks experience in regulating the activity of pension funds, introduction would have risked financial and pension fund instability. Moreover, in conditions where the population’s trust in financial institutions has already been shaken, this could have undermined for some considerable time any hope of developing a pension fund market.

Now, however, the growing demand for pension fund services, and implementation of a national policy to reform the pension system and develop various sectors of the financial market, make it possible to resolve these accumulated problems gradually.

This underlines the urgency of social reform in Armenia aimed at establishing a pension system compliant with European standards and the principle of social justice. Such a system must have the following characteristics:

• adequate benefits (according to European standards an employee with thirty years’ service should receive a pension equal to 40% of salary);
• fiscal sustainability;
• fairness (social contributions should be reasonable in relation to benefits);
• protection of the elderly from poverty;
• encouragement of voluntary compliance with making mandatory social contributions;
• preconditions for the development of voluntary pension insurance; and
• administrative feasibility.

Social reform in any country, and pension reform above all, is one of the most complicated policies to apply nationwide, since it affects the interests of a broad, primarily the most socially vulnerable sections of society. Consequently, it should be carried out in such a way as not to undermine the public’s trust in the reform process or the government. It is essential that reform be implemented transparently, with the population educated about its importance and urgency.

At present, conceptual approaches to the reform of the pension system have already been developed in Armenia, as has an action plan. A system of individual accumulative accounts has also been introduced in Armenia since 1 January 2006. Currently the most important task is the development of a strategic programme for carrying out reform using actuarial calculations for the next 25-30 years. This will aim to ensure the fiscal sustainability of the pension system and the predictability of the social consequences of reform.

The State social insurance fund has also been reorganized, with administrative expenditure cut and the responsibility for collecting social contributions transferred to the State tax service. Of course, this is insufficient by itself and the government intends to continue the pension reform with the aim of eventually resolving the problems identified earlier. All the necessary conditions are in place, the most important of which is that the political will for reform exists today in Armenia.

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