What a private pension scheme is and who takes part in it
Non-state pension insurance and provision in Georgia operates separately from the state pension system and is built around a pension scheme — a system of relationships between physical and legal persons, established by a founder. The scheme rests on a contract: under it, the founder assumes, in accordance with the procedure set by the pension scheme, the obligation of non-state pension provision for the participant, while the contributor assumes the obligation to pay pension contributions. The participant is the person for whose benefit contributions are paid and the pension is granted. Three roles therefore stand out in every scheme: the founder, who establishes the scheme and undertakes the payment of pensions; the contributor, who pays pension contributions; and the participant, in whose interest the whole arrangement exists.
It is precisely in order to protect participants’ interests that the Law of Georgia on Non-State Pension Insurance and Provision regulates in detail the establishment of a scheme, its types, the adoption and registration of its rules, and the termination of the scheme. If your organisation is considering establishing a pension scheme, or you are already a participant in one, it is important to understand that every stage of this process — from the form of the contract to registration with the National Bank of Georgia — follows a procedure prescribed by law, and disregard of these rules may lead to serious legal consequences, up to the cancellation of the scheme’s registration.
The non-state pension insurance and provision contract
The contract is concluded between the founder and the contributor in accordance with the legislation of Georgia. The law distinguishes three possible configurations: a contract may be concluded between the founder and the contributor for the benefit of another physical person; between the founder and the participant, where the participant is at the same time the contributor acting for his own benefit; and between the founder and the scheme’s employees, where the founder is itself the contributor acting for the benefit of its employees. In practical terms this means that a pension accumulation can be funded either by contributions paid by a third party — for example, an employer — or by contributions that a person pays independently for his own benefit.
A contract concluded for the benefit of a participant must contain a record of the investment directions of the pension accumulation and of the conditions under which the financial results of the pension scheme are reflected in the amount of that accumulation — in other words, the participant must be able to see where his accumulation is invested and how the results of investment affect its amount. The minimum requirements applicable to such a contract are determined by the National Bank of Georgia, which means that the parties’ freedom of agreement cannot fall below these minimum standards, and a draft contract should be checked for compliance before it is signed.
Types of pension scheme: defined contributions or a defined pension
According to the amounts of contributions and of the sums to be paid out, pension schemes are divided into two types. The first type covers schemes in which the amount of contributions is defined and the founder is obliged to create nominal pension accumulations in the names of the participants and to pay pensions regularly from those accumulations, in accordance with the contract provided for by the law. The defining feature of this model is that the emphasis is placed on the amount of the contributions: separate nominal accumulations are created in the names of the participants, and pensions are subsequently paid regularly at their expense.
The second type covers schemes in which the amount of the pension to be paid is defined and the founder provides for the payment of pensions whose amount does not depend on the amount of the nominal pension accumulation. Here the participant is promised a specific pension amount, while the source of payment is not tied to the volume of any nominal accumulation. Both models have their own advantages and risks, so choosing the type of scheme is a decision that deserves careful legal assessment.
The professional pension scheme
A professional pension scheme is a scheme founded by an employer, an association of employers or another legal person, in which the contributor is an employer. An employer or an association of employers may be the founder of one or several professional pension schemes, which allows an organisation to arrange pension protection for different categories of employees on different terms.
At the same time, the law imposes an important restriction in this area: a founder that is an association of employers, as well as the members of that association, may not be contributors in the pension scheme of another founder. Conversely, an employer that is neither the founder of a professional pension scheme nor a member of a founders’ association is fully entitled to be a contributor to one or several pension schemes of another founder. This distinction becomes practically important when a company decides whether to establish its own scheme or to join an existing one in the status of a contributor.
Employers’ association and employer schemes, and the supervisory board
An employers’ association (association, union) is a non-profit legal person entitled to carry out non-state pension insurance and provision, provided that the rules established by the pension scheme are agreed with the trade unions. The procedure by which employers’ associations carry out this activity is established by the National Bank of Georgia. For the purpose of controlling the activities of such schemes, a supervisory board is created, whose members perform their duties without remuneration, and half of the members of the supervisory board must be representatives of the participants. The supervisory board is also entitled, for the protection of participants’ interests, to have one or several trusted persons from among its members.
An employer’s pension scheme is established by the employer’s governing body in agreement with the trade unions. The non-state pension insurance and provision contract is then concluded either between the employer — which acts as founder and contributor at the same time — and an employee entitled to be a participant of a professional pension scheme, or between the employer and the trade unions in the form of a collective contract. To protect participants’ interests, a supervisory board is created here as well: half of its members must be representatives of the trade unions and, where trade unions do not exist, the participants themselves; the members of the board perform their duties without remuneration.
Scheme rules and amendments to them
The rules of a pension scheme are adopted by the authorised organ of the scheme’s founder — the supervisory board — in accordance with the legislation of Georgia. Amendments and additions made to the pension scheme must pass registration with the National Bank of Georgia in the manner established by legislation, so the rules and every amendment to them are subject to a mandatory state registration procedure.
When introducing amendments, the founder bears three obligations:
- to agree the amendments and additions made to the pension scheme with the supervisory board;
- to notify each participant about the amendments and additions no later than 30 days from the registration;
- to give any interested person the opportunity to familiarise themselves with the registered rules of the pension scheme and with the amendments and additions made to them.
This means that no amendment to the scheme’s rules should pass a participant by unnoticed: he is entitled to receive notice within the established period and to examine the registered rules himself. Such transparency is the precondition for participants making informed decisions.
When a pension scheme is terminated
The law establishes several grounds for the termination of a pension scheme, which describe both its natural completion and problematic circumstances:
- fulfilment by the founder of the obligation to pay pensions to all participants;
- transfer of participants to other pension schemes;
- departure of participants from the pension scheme;
- non-fulfilment of obligations by the contributor;
- the founder’s decision;
- non-fulfilment by the founder of its non-state pension insurance and provision obligations, as confirmed by a court decision;
- instability of the founder’s financial situation;
- cancellation of the pension scheme’s registration by the National Bank of Georgia.
Termination of a scheme always affects the interests of the participants, so timely information and a correct assessment of its consequences are particularly important. If you have questions about establishing a pension scheme, its rules or its termination, use the assistance of an experienced lawyer — the Legal.ge team is ready to defend your interests.