Non-state pension funds (NSPFs) are a common instrument for accumulating pension savings worldwide. In recent years, the number of NSPF participants in Ukraine has been steadily increasing, yet many myths and misconceptions still surround them, preventing people from making an informed choice about their future.
This article aims to dispel the most common myths about NSPFs and present you with objective information about their operations, advantages, and risks.
Myth #1: NSPFs are risky
Where does this opinion come from?
- Distrust of financial institutions due to a lack of information and knowledge;
- Negative experiences with other investments, for example, the loss of savings in savings books, which negatively affected Ukrainians’ trust in long-term investments. Concerns that NSPFs may invest pension funds in risky assets, leading to their loss.
Debunking the myth:
- NSPFs are created and operate in accordance with the Law on Non-State Pension Provision, according to which a fund cannot be declared bankrupt. Even in the event of a decision to liquidate the fund by its founders, the law obliges to transfer all funds to another pension fund. This mechanism ensures that the loss of pension savings is impossible;
- Funds offer various investment strategies, from conservative to aggressive, and allow investors to choose the level of risk they find most optimal for themselves;
- NSPFs invest pension funds in assets with a high level of reliability. There are also strict legal requirements for selecting assets and their share in the fund’s portfolio. For example, investments in deposits are allowed up to 50% of all funds, but no more than 10% in one bank. Up to 50% is allowed to be invested in government securities. No more than 40% can be invested in other types of assets, such as corporate stocks and bonds, and again – no more than 5% in one issuer. This distribution of investments is more reliable than putting all your money “in one basket,” as in the event of problems with a certain asset, the bulk of the savings remains completely safe since its share in the portfolio is small;
- The fund’s assets are separate from the assets of the servicing companies, and they belong to the fund’s participants;
- If you are not satisfied with the fund’s performance or its service, you can transfer your funds to another NSPF whenever you wish.
Myth #2: NSPFs are an investment only for the wealthy
Where does this opinion come from?
- The belief that to have a high pension level, one must only make large contributions, otherwise, it won’t work;
- The widespread belief that starting to invest in an NSPF requires a large “start-up” sum. This belief formed by comparing NSPF investments with other investments. For example, deposits usually require a significant contribution to feel the profits, as investing a small amount in a deposit will not yield the desired result. Or real estate, which requires very high capital investments not only for purchase but also for maintenance.
Debunking the myth:
- Any person can join an NSPF, regardless of income level;
- There are no obligations regarding the amount and frequency of contributions. NSPFs are a flexible tool for accumulating pension savings, you can contribute any amount when convenient. For instance, if you are unable to transfer funds to a pension account this month, you don’t have to do so;
- Even small but regular contributions over many years can lead to a significant amount of savings. After all, this is a long-term tool where regularity is key, not the size of the contribution. You can calculate your potential pension using a non-state pension calculator.
Myth #3: My savings in an NSPF will depreciate
Where does this opinion come from?
- Many people hesitate to invest in NSPFs because they do not understand their fundamental principles of operation and overall objectives and fear that their investments may depreciate due to inflation;
- There are concerns that the economic situation in Ukraine may negatively affect the activities of NSPFs.
Debunking the myth:
- It’s worth noting that NSPFs, as a tool, were created for the preservation and accumulation of pension savings. Its main goal is to protect savings from inflation and increase them by investing in financial instruments. And funds that use currency strategies protect your money from devaluation;
- Interest from investments is not just accrued on the invested sum, but on the sum with interest, which multiplies the income in a geometric progression. Compound interest begins to work after the first contribution, maximizing the investment’s efficiency. The longer a participant is in the fund, the more profitable their investment. Moreover, the money continues to work even when you receive payouts. The balance on your account continues to generate income;
- When choosing a fund, it’s important to pay attention
to its historical profitability. Analyzing the fund’s performance based on a single year is not accurate. This can depend on various factors, such as economic conditions, political events, etc. Historical profitability provides a clearer picture of what to expect from the fund in the long term. It shows how the fund reacted to different market conditions over many years.
Myth #4: State pension is guaranteed, NSPF is not
Where does this opinion come from?
- It’s often believed that if you start forming your own pension through an NSPF, you won’t receive a state pension;
- There’s a notion that the state guarantees pension payments, but NSPFs do not.
Debunking the myth:
- In fact, pension savings in NSPFs do not replace the state pension; it’s an additional tool for forming pension savings and does not affect pension payments from the state;
- The solidarity pension system in Ukraine faces demographic and economic challenges:
- a decrease in the number of working people;
- an increase in the number of pensioners;
- a shortage of funds. These factors negatively affect the state pension and its amount in the future. Unfortunately, most pensioners receive a low state pension, which often does not cover even basic needs. This confirms that to form a decent future, it is necessary to use additional tools, remember you are the guarantor of your secure future;
- Pension savings in NSPFs are your private property, even in the event of your death, your funds will be inherited by your relatives.
Myth #5: NSPFs limit access to savings
Where does this opinion come from?
- People fear they won’t be able to access their savings in case of need;
- Information regarding early withdrawal is often inaccurately presented, creating a false impression of the real situation.
Debunking the myth:
- First and foremost, it’s important to remember that NSPFs are a targeted investment tool aimed at accumulating pension savings. With NSPFs, you can ensure financial stability and independence in retirement;
- NSPFs not only increase your investments and help form a decent pension capital, but they also protect your funds from your own temptations. Sometimes there’s a desire to give in to impulse and purchase something “here and now,” forgetting about the global goal. With NSPFs, your funds are protected from these spontaneous urges;
- Legally, you can use the funds accumulated in an NSPF after reaching retirement age (currently 50 years). However, there are situations when it is possible to withdraw funds early:
- if the participant moves permanently abroad and has this noted in their passport;
- has a medically confirmed critical health condition (cancer, stroke, disability).
