Pension reform in Slovak republic

18th October 2006, Bucharest

Júlia Čillíková

National Bank of Slovakia

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Contents

Historical reasons for pension reform Legal framework Key principles of new pension system Some figures from 2nd pillar, fees and guarantees Some figures from 3th pillar Potential risks to the new pension system

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Historical reasons for pension reform1st and 2nd pillar:- negative demographic development- high rate of redistribution- low retirement age/ elongating lifespan- high payroll taxes- pensions depend mainly on earnings reached during

last working years 3rd pillar:- assets: more than 14 mld. SKK / clients: more than

600 000- necessity of separation of savers’ property from

company’s assets

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Evolution of pension reform 2002 - 2003Slovak government decided in the government statement in

2002, that the old system must be transformed into a system:

- providing adequate pension benefits- with increased importance of voluntary pension

schemes

In January 2003 the concept of reform was created, focusing on:

- preservation of financial stability of the whole pension system

- diversification of financial sources for pensions’ funding- raising of personal interest of population on its own

conditions in retirement

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Legal framework

1st pillarAct No. 461/2003 Coll. on social insurance

2nd pillarAct No. 43/2004 Coll. on old-age pension savings

3rd pillarAct No. 650/2004 Coll. on supplementary pension

savings

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Key principles of new pension system

1st pillar – pay-as-you-go system

2nd pillar – mandatory, fully funded defined contribution system

(from January 2005)

3rd pillar – voluntary pension scheme, contributory defined

(exists from 1996, from 2005 ongoing transformation)

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2nd pillar

- saving on saver’s personal pension account- the aim is to assure an income in old age or in

case of death to his/her survivors- the height of pension depends on: 1. the amount of money that the saver

saved on the personal pension account 2. the net rate of return on the savings - savers’ pension savings are heritable- assets (pension savings) are managed by

Pension asset management companies (PAMC) competing on the market with the license granted by FMA/NBS

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2nd pillarThe employer (self employed person, voluntarily

insured person, state or Social Insurance Agency) is obliged to send 9% of the wages (base of assessment) to the Social Insurance Agency .

Average monthly wages of employees in economy of Slovak republic is as of 2. quarter 2006 18 324 SKK (without entrepreneurs incomes and including incomes of armed forces - data are adjusted by statistical estimate of non-registered wages).

The Social Insurance Agency is responsible for collection of contributions in the first and second pillar. After receiving money from employers SIA transmits corresponding amount of money to the personal saving account of the saver in the respective PAMC.

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2nd pillarSeptember 2006

1, 514 million of people became involved in 2nd pillar

(of this 9 thousands of people compulsorily)

Savers’ structuresMen 751 135 Women 763 361

...25 – 29 years 323 354 savers (most numerous category)30 – 34 years 318 357 savers...60 – 70 years 600 saversOver 70 years 10 savers

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2nd pillar

PAMCs are obliged to establish three types of funds:

- Conservative pension fund (only bond and monetary investments and transactions to constrain currency risk)

- Balanced pension fund (shares up to 50% of the assets, bond and monetary investments at least 50% of the assets)

- Growth pension fund (shares up to 80% of the assets)

The value of assets in the respective pension fund invested in issues of issuers domiciled in the territory of Slovak republic shall be at least 30% of the total volume of assets in the pension fund.

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Allianz – Slovenská dôchodková správcovská spoločnosť

Aegon, d. s. s., a. s.

ČSOB d. s. s., a. s.

ING dôchodková správcovská spoločnosť, a. s.

VÚB Generali dôchodková správcovská spoločnosť, a. s.

Winterthur d. s. s., a. s.

Prvá dôchodková sporiteľňa, d. s. s., a. s. Sympatia – Pohoda, d. s. s., a. s.

PAMCs

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PAMCGrowth pension

fund

Balanced pension

fund

Conservative

pension fund

Number of savers

Winterthur3 472

3961 344

615171 640 375 666

AS DSS3 330

7321 663

671270 453 424 790

VUB Generali

1 652 781

1 079 794

149 806 202 703

ING 133 717 587 524 61 994 153 956ČSOB 653 507 309 429 32 672 88 125AEGON 794 097 308 419 49 344 157 712

Net asset value as of June 30, 2006in thousands of SKK

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Investment allocation in conservative pension funds as of June 30, 2006

PAMC Money market Obligations

Aegon 100% 0%

AS DSS 55,78% 44,22%

ČSOB 75,03% 24,97%

ING 79,70% 20,30%

VÚB Generali 61,00% 39,00%

Winterthur 94,20% 5,80%

Sum (weighted average)

71,64% 28,36%

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Investment allocation in balanced pension funds as of June 30, 2006

PAMCMoney market

Obligations Stocks

Aegon 76,61% 6,78% 16,61%

AS DSS 51,12% 38,70% 10,18%

ČSOB 52,38% 36,90% 10,72%

ING 67,20% 23,60% 9,20%

VÚB Generali 66,66% 24,06% 9,28%

Winterthur 82,30% 7,60% 10,10%

Sum(weighted average)

65,55% 24,17% 10,27%

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Investment allocation in growth pension funds as of June 30, 2006

PAMCMoney market

Obligations Stocks

Aegon 75,16% 6,00% 18,83%

AS DSS 50,23% 37,24% 12,53%

ČSOB 47,97% 38,77% 13,27%

ING 63,70% 22,80% 13,50%

VÚB Generali 65,41% 23,50% 11,09%

Winterthur 81,00% 6,80% 12,20%

Sum (weighted average)

65,20% 21,98% 12,82%

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FeesPAMC is entitled to charge 2 types of fees:- fee for pension fund asset management may not exceed

0.08% of the average monthly net asset value of the pension fund (includes all costs of PAMC related to asset management in a pension fund with exception of taxes related to assets)

- fee for working of personal pension account is set at 1% of the amount of a monthly contribution of a saver

Social insurance agency deducts a sum corresponding 0.5% of a monthly contribution

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Fees for managing of pension funds as of June 30, 2006

PAMCGrowth

pension fundBalanced

pension fundConservative pension fund

Aegon 0,069% 0,069% 0%

AS DSS 0,07% 0,07% 0,07%

ČSOB 0,07% 0,07% 0%

ING 0,08% 0,08% 0,08%

VÚB Generali 0,08% 0,08% 0,08%

Winterthur 0,08% 0,08% 0,08%

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GuaranteesThe Social Insurance Agency guarantees in extenso of the

solidarity reserve fund for damage caused by a decision, procedure or other performance of PAMC and its depository that is in contradiction with generally binding legal regulations and that resulted in damaging the assets in the pension fund.

Whenever after elapsing of 24 months since the day when PAMC started creating a pension fund, the average yield of the respective pension fund may not be lower than

- 90 % of the average yield of market competitors at conservative pension funds,

- 70% of the average yield of market competitors at balanced pension funds,

- 50% of the average yield of market competitors at growth pension funds.

Within five days since breaching of the this condition or since finding out the breach of this condition by NBS, PAMC is obliged to transfer, from its own property to the asset of a pension fund, assets in such a value, that the average yield of the respective pension fund attains at least the average yield of its competitors.

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3rd pillar

The System of complementary pension savings which has already existed in Slovakia is in the process of transformation.

According to the Act No. 650 Coll. all complementary pension insurance companies that had operated in the field of pension savings before January 1, 2005 had to submit transformation project to FMA/NBS.

The set up of new company was pre - conditioned by granting a new license. Three licenses have already been granted, the fourth and last one will be granted in the near future.

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3rd pillar- collecting of contributions from participants and

their employers

- the aim of supplementary pension savings is to allow to participants acquiring of complementary pension income in old age or in case of completion of executing certain specific professions

- the height of supplementary pension depends on the amount of money that the participant saved on the personal account and the net rate of return on the savings

- assets are managed by Supplementary pension companies (SPC) competing on the market with the license granted by FMA/NBS

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3rd pillarSPC is obliged to manage no less than 2 funds:

- at least one “subscription” pension fund (with different investment profiles)

- one “paying-out” pension fund

Investment profile of the “subscription” pension funds shall follow the same principles which are stipulated in the Act on old-age pension savings.

“Paying-out” pension fund – when member asks for redemption of benefits in the form of withdrawal with temporary annuity, SPC is obliged to transfer its balance from the “subscription” pension fund to the “paying-out” pension fund. The investment profile of this fund has to follow the same investment strategy and limits as the conservative pension funds in the 2nd pillar.

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SPCs

ING Tatry – Sympatia, d. d. s., a. s. (ING T-S)

Winterthur d. d. s., a. s.

Doplnková dôchodková spoločnosť Tatra banky, a. s.

(DDS TB)

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NAV and number of participants as of June 30, 2006 (in thousands of SKK)

SPCNAV

Participants Subscription fund

Paying-out fund

Winterthur2 124 631

0 128 000

DDS TB4 591 798

40 781 170 292

ING T-S7 655 743

535 260 375 060

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Investment structure as of June 30, 2006 (in thousands of SKK)

Investment

Bank accounts 8 573 174

Obligations 5 884 420

Shares 728 768

Others 17 302

Liabilities -255 451

Sum 14 948 213

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Potential risks to the new pension system

- more people than expected joined the 2nd pillar- impact on liquidity of Social Insurance

Agency- endangered fulfilment of Maastricht criteria

(Euro 2009)Possible solutions:- change in proportion of contribution (9:9

→12:6) - voluntariness in 2nd pillar (allow to savers exit 2nd

pillar and return exclusively to the 1st pillar)

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Thank you for your attention!

julia.cillikova@nbs.sk