Early withdrawal of pension savings and poor cooperation between parties

Although it is not against the law to withdraw funds invested in pension funds under the individual objective of receiving a pension before the age of over 65, this move is not recommended for two main reasons:

First, starting from the new draft regulation, every individual who has deposited funds for the future pension will be charged a 10 to 15% “fee” on the amount that is required to be withdrawn.

Second, this hasty financial movement of the individual will significantly affect the amount of pension benefit he will receive in the future.

Experience from countries with well-designed plans between public and private schemes has shown that they already have to contend with inadequate pension benefits for one or more of the well-known reasons (low contribution rate, even lower than required, fixed contribution rates, movement in/out of the labor force (especially for women and rural areas), low profitability rates, negative difference between real interest rates and real wage growth rates, rapid population aging, decline of births and reduction of the future labor force, etc.).

However, in the entire initiative undertaken unilaterally by the Financial Supervision Authority (FSA), which seems to seek to regulate certain relationships for the premature withdrawal of funds from the savings they invest in private funds, it is still seen that the outdated mindset of not consulting all parties and even more with the main actors is the biggest obstacle in the implementation of the law and its functionality.

The implication in this way and in this case of the FSA is considered negative because it works against the favor of alternation of schemes by interfering in this fragile market without creating the necessary bases for operation.

It may seem that the effort is in a positive sense and in support of achieving a prevention of outflow of funds from the private scheme.

But the question in the meantime is what counts as a “deficit: in the still initial applicability of the law for private pension funds?”

At this moment, but also in the future, the policy for private pensions may fail due to haste and the lack of official consultations and analyzes of the law and the failure to fulfill the long-term objective, that of guaranteeing a healthy market and not parallel to the public market of pensions, but a common part of the future market.

The objectives on which private pension investment is aimed, which are currently not yet considered complementary to the mandatory payment of funds towards the current state pension system, is to achieve in the near future a well-designed pension system as fully functional market. Future predictions through the combined scheme of private and state pensions are that the future pensioner will not know poverty in old age and on the other hand it will serve as a spending fund mitigating the economic uncertainties of the future. One of the great uncertainties that is mitigated through participation in them is that they update interests and keep the individual aware of any financial “vibration” of the international market, serving in this case also as professional guardians of money that is necessarily safe when it is entrusted to environments and places that have been created to keep them safe.

Through inclusion in these funds, which are still largely unknown products for the labor market and individuals, the fact of the security of the money invested in these funds is very important. However, the safety of the money invested in them is at the same levels as the safety of money in Albanian banks, where individuals deposit their savings. Meanwhile, with the introduction of money into pension funds, naturally this positively affects the personal income throughout the life of an individual, as they have an added value even higher than in commercial banks, but on the other hand they also have the function for which they are decided with dedication, they serve the future well-being of the individual, but why not also the family where he lives.

In a way, deposits in private pension funds are considered to be “financial time capsules”, which when opened after the terms of their management time have been met will be worth much more than if they had been consumed for expenses the moment, or even to store in banks as it happens until today.

However, as stated in a study by the World Bank[1], “a growing challenge has been balancing the real needs for some upfront liquidity, access to deposited savings, and adequate insurance to meet post-retirement needs for individuals”.

However, what is strongly felt today in the financial market of pensions is addressing and fulfilling the need for inclusion in private schemes, especially the categories of individuals who have low wages and are mostly close to 60% of the labor market, but also the category of employees in village and surrounding areas, who have problems with not participating in the labor market and the scheme, due to the impossibility and low financial culture, but also the impossibility that the state scheme gives them little and will give even less, if the contributions of they will remain at the payment levels as until today.

It is precisely the moment for the government together with the market operators to discuss addressing this situation in order to properly take additional decisions, beyond the law on private pension funds and the regulations and acts in its implementation. There is now a need for the pension scheme to have mandatory harmonization in the format of a balancing model, where more and more as national social security coverage, private systems must be included in order to expand the contribution fund to include more of all individuals who today are not part of the formal market or are so to speak as they have a salary, which often has lower levels than the minimum living income, accompanied by many periods of unemployment and more irregular earnings, which come as a consequence of the irregular Albanian market.

In the comment of the draft of the new regulation [2] which seems to be consulted with a part of the public, the pension funds must be maintained anyway by all parties participating in the pension market, that:

– The pension market should not continue to be a monopoly of the state, as it cannot fulfill the sole objective of providing adequate pensions to individuals through portfolio management, but to open and expand through strengthening the role of his, but with a strengthened supervision of the relevant institutions to increase the reliability and security of individuals who trust the state. The challenge is therefore to balance the current best interests of individuals with their future retirement needs, without compromising living standards for the sake of adequacy.
– Finding that the contribution levels and other parameters in the private pension system are strategically determined, they are almost immutable for the future and are thus structured to provide a steady income until retirement age. All this is worth promoting in the service of a relationship of trust that the suitable pension for the future is based on continuous and reasonable contributions.

It is important to remember that no system, no matter how well designed, can compensate for the current crisis of declining contribution profitability, as the system does not work for today, but for the future. The total savings goes into the accounts that manage to justify the level of future expenses for a quiet life and with sufficient funds for a dignified life.

But if people are going to tap into their savings when day-to-day expenses are enough to finance their living, then the fact must be ingrained that withdrawing funds will serve no purpose for future financial security.

[1] https://documents1.worldbank.org/curated/en/757001551715193169/pdf/Early-Access-to-Pension-Savings-International-Experience-and-Lessons-Learnt.pdf

[2] “For determining the fines that apply in the case of premature withdrawal from the private pension fund”