EXECUTIVE SUMMARY

In the past year or so Georgia has experienced significant declines in economic governance. In addition to the anti-democratic Law on Transparency of Foreign Influence (known as the Agents Law), several laws and legal amendments initiated by the ruling party and the Parliamentary majority have drawn significant attention from stakeholders, experts, and the general public. These developments raise serious concerns about the weakening of economic governance in Georgia. Key changes amongst others include alterations in the governance of the National Bank of Georgia, the so-called Law on Offshores, and amendments to the pension legislation, which are currently under review by Parliament. The note compares Georgia's proposed changes to the pensions system with successful models from countries like Canada, Sweden, the Netherlands, and Denmark, emphasizing that balanced governance structures, ensuring high competence and independence of the board, and stakeholder involvement are crucial for an effective pension system and for ensuring its best possible risk management in the interest of pension fund participants and their welfare.

Firstly, the proposed amendments will replace the existing supervisory and investment boards, appointed by Parliament, with a single governing board. This new board, based on the proposed amendment, is to be appointed solely by the Prime Minister rather than approved by Parliament, and its representatives will have lower professional qualifications. The subject Board will manage both the investment and administrative functions of the pension scheme. While such centralization is announced to serve to streamline the management, it risks reducing transparency and stakeholder involvement, potentially compromising the independence and effectiveness of the governance structure and increasing risks of political influences. Unlike Georgia, countries like Canada and Sweden employ diverse and inclusive processes for selecting board members, ensuring a wide range of expertise and perspectives, thereby enhancing governance quality.

Secondly, the proposed amendment eliminates the involvement of private asset managers, meaning that assets will not be managed externally by choice of individuals. This restriction significantly reduces competition within the pension system and limits the choices available to pension scheme 1,5 million participants. Successful models in countries like Sweden and the Netherlands demonstrate that allowing participants to choose among different asset managers leads to higher returns and a more robust capital market. Georgia's approach could hinder market development and reduce overall system efficiency.

Thirdly, the proposed amendments propose to increase the limits on investment opportunities, allowing the pension fund to invest in a broader range of assets including the higher-risk category of other types of assets. The lack of a clear definition for "other types of assets" introduces risks, particularly concerning potential investments in government projects. Such investments, without proper oversight, could lead to mismanagement and corruption, jeopardizing the fund's integrity and 1,5 million participants' financial security. While the Ministry of Finance asserts that funds will primarily be invested in bonds, the expanded investment freedom increases the risk of politically influenced decisions. Such risks become even more alarming in light of the changed course of strategic partnerships and intentions of involving sanctioned Chinese companies in the major strategic port project. Successful pension systems, like those in Denmark and the Netherlands, maintain stringent controls and balanced governance to mitigate such risks.

The proposed legal regulatory changes to the pension system bear the risk of adversely affecting future welfare of pension funds 1.5 million participants.