What changes await pensioners in the new law

The Government of the Federation of BiH, at today's session in Sarajevo, adopted and sent to the FBiH Parliament the Bill on Pension and Disability Insurance, the text of which is based on the Strategy for the Reform of the Pension System in the Federation of BiH, adopted by the Parliament of the Federation of BiH. This is a law of key importance for the Federation of BiH for ensuring the financial stability of pensioners, improving the pension and disability insurance system, and ensuring its long-term financial stability, reports the BiH news agency Patria.

The law is based on guidelines based on unfavorable forecasts of the social sustainability of the pension system in the Federation of BiH and unfavorable demographic prospects.

During the drafting of the new law, a series of meetings were held with stakeholders, including the Alliance of Independent Trade Unions of BiH, the Employers' Association of the Federation of BiH, and, importantly, the Alliance of Pensioners' Associations in the Federation of BiH, who submitted proposals, remarks, and suggestions on the Draft in writing, which were considered and, for the most part, incorporated into the text of the Law.

The demands of pensioners' associations for timely provision of funds for pension payments by the fifth of the month, guarantees of pension payments at the current level regardless of inflows from contributions - treasury operations, pension adjustments according to the growth of the consumer price index (cost of living), provision of death benefits to the families of deceased pensioners, and funds for the rehabilitation of sick and most vulnerable pensioners have been met.

The goals of the pension system reform in FBiH are to mitigate the effects of aging on the pension system, reduce premature retirement, fairer calculation of pensions based on paid contributions, fair deduction for early retirement and incentives to remain in employment, reduction of excessive expenditures for disability and survivor pensions, increased activity of the working-age population and improved contribution collection, and prevention and mitigation of the decline in pension adequacy in FBiH.

The law recognizes several types of rights from pension and disability insurance, namely the right to an old-age and disability pension, rights of insured persons with changed work capacity, rights based on physical disability, the right to a survivor pension, and, as a novelty, a one-time death benefit.

The scope of rights depends on the length of the insured person's pensionable service and the amount of salaries and insurance bases on which PIO contributions have been paid.

A novelty in this law is the new system for determining pension amounts through the introduction of a points formula, where the pension amount is based on pensionable service and paid contributions. This, automatically, leads to greater fairness, as insured persons who contribute more will have higher pensions, with the note that the new law also provides a mechanism for protecting the most vulnerable categories through the so-called minimum pension, at the current amount, which will continue to be adjusted according to the growth/index of consumer prices.

For each year of service with paid contributions, the insured person earns points proportionally to the amount paid: 1 point if the salary was the same as the average salary, 2 points if it was twice the average, 0.5 if it was half the average, etc. At the time of retirement, the insured person's pension amount is determined by multiplying the total points earned during their working life by the value of the general point (monetary amount in KM).

The value of the general point (13.6 KM) is adjusted according to the percentage increase in the average gross salary in the Federation of BiH in the previous year, and pensions are adjusted according to the percentage increase/consumer price index on an annual basis in the Federation of BiH in the previous year. Therefore, by abandoning the coefficient system and introducing regular and transparent pension adjustments, the best world practice is being introduced into the pension system in the Federation of BiH.

The proposed adjustment of the point value to salary growth maintains full proportionality between the initial pension value and contributions and the productivity of the retiring generation. Once approved, the pension will be adjusted for life according to the cost of living, meaning its real purchasing power will never fall. If economic trends in the country are favorable, and there is growth under favorable fiscal conditions, a decision can be made on an additional adjustment above the growth of consumer prices, but no more than half of the growth of real wages (the so-called Swiss formula).

Treasury operations for insurance carriers mean that all revenues from PIO contributions would flow into a single "budget account" from which pensions would be paid. This approach would ensure greater transparency in public spending and stability of pension payments. Due to the complexity of introducing treasury operations, a transitional period is foreseen for its implementation, during which financial and technical capabilities must be created, which cannot exceed two years from the date the law enters into force. The possibility of doing so earlier is left open, with the Government of FBiH making the decision.

One of the novelties is that a member of a business company or other organization, a member of a management or supervisory body, a person performing work based on a contract for work, an author's contract, or another contract and who receives a contract fee, has the right to have the paid fee recalculated into pensionable service.

This service is calculated based on the achieved contract fee for which adequate contributions have been paid. Pensionable service with effective duration, expressed in months, is determined by dividing the amount of the contract fee with taxes and contributions, i.e., the gross amount of the contract fee paid during the year, by the average monthly gross salary in FBiH achieved in the previous year. In this way, the insured person effectively increases their income, and thus their pension amount.

Pensionable service for unemployed persons with effective duration includes the period for which contributions have been paid for an unemployed person in accordance with the regulations governing the rights of unemployed persons.

In accordance with the general goals of creating a stronger link between pensions and paid contributions, as well as ensuring the long-term sustainability of the system, adequate contribution rates for so-called beneficial pensionable service need to be prescribed. For these reasons, it is necessary to introduce the payment of an actuarially fair PIO contribution rate for each month of determined payment for insured persons whose pensionable service is calculated with increased duration. Therefore, it is necessary to conduct a review of all workplaces for which service is calculated with increased duration in accordance with changes in technological processes and the need for a longer stay in the work process.

An insured person is entitled to an old-age pension when they reach the age of 65 and have at least 15 years of pensionable service, or at least 20 years of pensionable service, or when they have 40 years of pensionable service regardless of age.

For an insured person with increased pensionable service, the age limit for obtaining an old-age pension is reduced by the total increase in service, but not more than 45 years of age.

A transitional period is foreseen in which male/female insured persons can obtain the right to an old-age pension even before the conditions prescribed by this law are met. Thus, an insured person is entitled to an old-age pension when they reach 40 years of pensionable service and at least 62 years of age. A gradual increase in age and, in parallel, years of pensionable service is foreseen, with the aim of reducing the number of early retirements. For men, starting from 2016, it is 60 years and six months of age and 35 years of pensionable service, and each subsequent year, both age and required pensionable service increase by six months. For women, also starting from 2016, it is 55 years and six months of age and 30 years of pensionable service, with the same increase of six months each subsequent year of age.

Instead of the previously planned abolition of early retirement in 2015, the possibility of early retirement is foreseen with a fair deduction. This milder version of early retirement better reflects the current labor market situation and does not place the first subsequent generations of pensioners in a significantly unfavorable position, as a radical abolition of early retirement would.

There were no major changes in the segment of disability pensions, but prerequisites and guidelines have been created for amending other regulations governing this area, which will ultimately lead to a stricter procedure and methodology for assessing remaining work capacity, resulting in a reduction in the number of new disability pensions. Expectations are that the share of disability pensions in the total number will fall from the current 23% to 18% in the next three decades, and to eleven percent, as it is today in the European Union.

A disability pension is determined in the same way as an old-age pension, i.e., by multiplying the insured person's personal points by the value of the general point on the day the right is acquired.

Certain protective mechanisms have been retained, e.g., that a disability pension for an insured person with less than 15 years of pensionable service cannot be less than the amount of the minimum pension, and that for an insured person whose disability is caused by a work injury or occupational disease, the pension is determined for 40 years of pensionable service.

The conditions for acquiring the right to a survivor pension have generally been tightened (pension payments are conditional on reaching a certain number of years) to reduce the number of survivor pensions, and incentives have been introduced for potential beneficiaries of these pensions to enter the labor market, which is one of the reform directions established by the Pension System Reform Strategy in the Federation.

Certain exceptions have been made that are appropriate to the social and economic situation, taking into account specific situations observed in practice where widows/widowers permanently lost their right to a pension.

A special exception has been made in the case of widows of fallen soldiers of the Army of BiH, HVO, and MUP, as it is foreseen that the widow of a martyr, i.e., a fallen defender, has the right to a survivor pension when she reaches the age of 50. Previously, she permanently lost this right.

In order to protect against poverty and partially maintain the concept of solidarity, the minimum pension mechanism has been retained. This is the amount of the minimum pension paid in December 2015 in the Federation of BiH, adjusted for all applicable increases on the day the right is acquired. This amount is further adjusted from January 1st of each year according to the percentage increase in consumer prices on an annual basis in the Federation of BiH in the previous year.

It is foreseen that the Government of the Federation of BiH may, exceptionally, by a special decision, determine an increase in the amount of the minimum pension by a percentage greater than the percentage increase in the cost of living. The maximum pension amount is prescribed indirectly through the annual personal coefficient, which can be a maximum of five.