On Mechanism of Old-age Pensions Valorization

Starting with January 2010 the mechanism of pensions valorization envisaged by amendments made to the Federal Law "On old-age pensions" comes into effect. This mechanism was aimed at raising pensions not on equalizing terms, but taking into account the labor experience of each pension recipient individually. 


Valorization (raising) procedure for calculated pension capital is regulated with articles 30.1-30.3 of the Federal law fr om 17.12.2001 No 173-FZ "On old-age pensions in the Russian Federation". 

The pension capital itself is defined by paragraph 30 article 14 of the Federal Law "On old-age pensions" according to the formula: PK=(RP–Br)xTs, where
PK – is the value of pension capital;
Br – old-pension basic rate as on January 1, 2002 (RUR 450 a month);
Тs – number of months of the expected period for old-age pension payment, applied to calculate the insurance part of the pension mentioned, which is equal to 19 years (228 months);
RP – calculated rate of old-age pension.

For men with the total practical experience of no les than 25 years and for women with the total practical experience of no less than 20 years old-age pension rate (RP) is calculated according to the formula: RP=SKx(SZ:SP)x SZP, where
SZ – is the average monthly earnings of the insured in 2000-2001 according to the data of the individual (personified) accounts in the system of compulsory pension insurance or over any 60 months in a row on the basis of documents issued by employers or state (municipal) bodies according to the established procedure;
SP – average monthly wages in the Russian Federation over the same period;
SZP – average monthly wages in the Russian Federation in the period from July 1 to September 30, 2001 (RUR 1671);
SK – is a coefficient reflecting working experience, which makes 0.55 for the insured (excluding the disabled with the 1st extent of work limitation), and is raised by 0.01 over each full year of working experience over the length mentioned above (25 and 20 years, respectively), but no less than by 0.2.

The valorization sum makes 10% of the calculated amount of pension capital (PK), and further 1% of the volume of the calculated pension capital for each full year of working experience acquired before January 1, 1991.

For the purposes of valorization the general working experience includes the periods of work and other activities beneficial for the society, which were included in this experience for estimation of pension rights.

When estimating pension rights the general working experience accounts for the sum length of working and other activity beneficial for the society carried out before January 1, 2002, which includes:

  • periods of works as a worker, office worker (including employment out of the borders of the Russian Federation), a member of a collective farm or another cooperation; periods of work during which the employee not being a worker or an office worker was subject to compulsory pension insurance; periods of work (service) in military security, special communication bodies or mine-rescue unit regardless of its nature; periods of individual working activity, including those in agriculture;
  • periods of creative activity of the creative union members- writers, painters, composers, filmmakers, theatre workers, as well as writers and artists that are not members of creative unions;
  • period of service in the Armed Forces of the Russian Federation or other military units formed in concordance with the RF legislation, Unified Armed Forces of CIS, Armed Forces of the former USSR, bodies of internal affairs of the Russian Federation, foreign intelligence service, federal executive bodies in which military service is envisaged, former state security bodies of the Russian Federation, as well as state security bodies and internal affairs bodies of the former USSR (including in the periods the bodies had other names), stay at partisan detachment during the Civil War and Great Patriotic War;
  • periods of temporary inability to work, starting during the period of work, period of disability of the 1st and 2nd category resulting from the severe injury connected with production or with professional illness;
  • period of stay at the places of confinement exceeding the period fixed when the case was reconsidered;
  • periods of being on unemployment benefit, participation in social works, journey to another place directed by the placement service and work placement. 

    The volume of old-age pension insurance part taking into account the sum of valorization starting with January 1, 2010 for citizens that are recipients of the old-age pensions mentioned up to January 1, 2010 is defined according to the formula: P=B+P1+SV:(T:N)xK, wh ere
    P – is the rate of insurance part of old-age pension, rate of disability pension, rate of survivor’s pension;
    B – is a fixed basic rate of insurance part of old-age pension;
    P1 – is the rate of insurance part o old-age pension as on December 31, 2009;
    SV – valorization sum;
    Т – number of months of the expected period of old-age pension payment, applied when a citizen is awarded insurance part of a corresponding old-age pension, which in case of disability pension or survivor’s pension is calculated with multiplication by the ratio of a standard work experience of a disabled (deceased breadwinner) to 180 months;
    N – number of family members of the deceased breadwinner that are not able to work and are recipients of survivor’s pension established in connection with the death of the breadwinner as on January 1, 2010;
    К – sum coefficient of indexations and additional increments of old-age pension insurance part, which were adopted in the Russian Federation over the period since the citizen was awarded the insurance part of the corresponding old-age pension before January 1, 2010 .

    The formula presented above demonstrate that although the principle of valorization – "10% + 1% for each year of Soviet working experience" seems quite easy but the mechanism for calculation each individual pensioner is rather complicated and requires additional clarification. With this purpose the official site of the RF Pension Fund presents the example calculations of old-age pension with valorization1. It becomes clear from the examples that even if a "Soviet"  working experience is a long one, the rate of additional payment to the pension taking into account valorization varies from one to two thousand rubles. Taking into account the current pension rate such an additional payment can be undoubtedly considered as significant. However the application of valorization mechanism itself does not give grounds to speak of fulfilling the task on qualitative increase of situation with pension provisions. 

    D.A. Kazantsev - Senior Legal Expert, Department of the Appraisal and Development of Normative-legal Acts