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Strong capital market and pension reform go hand-in-hand
Exchanges have an opportunity to grow and generate revenue by partnering with government to redefine pension systems.
 Like many countries Armenia is facing a demographic time bomb; life expectancy is rising and birth rates are falling. Soon, there will be fewer workers paying taxes to support elderly pensioners.
After five years of extensive research the government decided to replace the current pay-as-you-go pension structure with a mandatory defined contribution system. Developing a solid implementation plan and a strong capital market are critical to the plan’s success. Exchanges worldwide have an opportunity to grow and generate revenue by lending their expertise to such projects.
In the future, Armenians will have to take more responsibility for their pensions. A percentage of wages earned will be channeled into individual savings accounts, and individuals will be offered a choice of investment options. Upon retirement everyone (including those who did not work) will receive a minimum government pension in addition to an annuity equivalent to the amount accumulated during their working lives.
The Ministry of Economy and the Central Bank of Armenia worked with NASDAQ OMX Advisory to create an implementation plan. NASDAQ OMX has unique expertise in this area, having set up similar pension systems in Estonia and Latvia. “We started by mapping the pension system processes and the needs of the organizations involved,” says Johan Fredholm, Senior Advisor at NASDAQ OMX. “We then specified the technology needed to support those processes.”
“We expect new pension legislation to be approved by the government by autumn and to be debated in parliament through the end of the year,” says Nerses Yeritsyan, Armenia’s Minister of Economy.
How the portfolios will be managed and the risks balanced are among the issues still to be debated, and legislation pertaining to disability and to pensions for the self-employed will have to be amended.
The plan call s for the new pension laws to come into effect in 2010. Then the government will educate ordinary citizens about the system and its benefits. After implementing the appropriate infrastructure, pension reform will start in 2011. NASDAQ OMX will continue to support the implementation process and deliver and operate the technology platform.
Minister Yeritsyan notes that the government has done rigorous calculations but he adds that some adjustments may have to be made when the pension system is implemented. “Initially the level of savings is not going to be that high, but in later years we might face some challenges,” he says. “That is why we must also develop our local capital market and suitable investment tools as soon as possible.”
Lessons learned
The international debate about pension reform continues, and much can be learned from other countries’ experiences. Government officials should hear about real-world experiences directly from those who have undertaken similar projects. Armenian pension reform has benefited from lessons learned in Estonia and Latvia where new pension systems have been successfully and cost efficiently operated by NASDAQ OMX since 2002 and 2004 respectively. But each country’s circumstances are unique, and solutions have to be adapted to suit the local demographic, economic and technological conditions.
by Sherree DeCovny
illustration Valero Doval
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