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Pension reform in the Slovak Republic:Progress and overview

Marek LendackýMinistry of Labour, Social Affairs and Family

Slovak Republic

Seminar"Pension Reform in Eastern Europe, Experiences and

Perspectives"Kiev, Ukraine, May 27-28, 2004

President Hotel Kyivsky

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Outline of Presentation

Pre reform periodPast and future demographic environmentImplicit pension debtBasic documentsEarly reform measuresMain reform – I. pillarMain reform – II. pillar (structure, features)Implementation stageWhy second pillar reform strategy

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Pre Reform Period

Transformation from planned to market economyWorsening of economic and demographic situationSocial security financed completely from state budgetCzech and Slovak Republic divorce (1993)Old social security law (1988) – covered all parts of social securityPAYG-financing with very low reservesBig redistribution (very progressive formula)Preferential treatment (special working categories)High contribution rate (28 % total)Low retirement age (M – 60Y, W – 53-57Y)

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Past Demographic Environment

YEAR Total population

Total population increase

Live births per 1000 inhabitants

Deaths per 1000 inhabitants

Total increase per 1000 inhabitants

1950 3 463 446 45 595 28.8 11.5 17.3 1960 3 994 270 48 723 22.1 7.9 14.2 1970 4 528 459 33 969 17.8 9.3 8.5 1980 4 984 331 41 392 19.1 10.1 8.9 1985 5 161 789 34 399 17.5 10.2 7.3 1990 5 297 774 23 048 15.1 10.3 4.8 1995 5 363 638 11 583 11.5 9.8 2.2 1998 5 393 382 5 732 10.7 9.9 1.1 1999 5 398 657 5 275 10.4 9.7 1.0 2000 5 402 547 3 890 10.2 9.8 0.7 2001* 5 378 951 168 9,5 9,7 0,0

* According to Population and Housing Census 2001

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Future Demographic Environment

Demographic dependency ratio

0,00

0,501,00

1,50

2,00

2,50

3,00

3,50

4,00

4,50

5,00

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Implicit Pension Debt

Bln. Sk % GDP Bln. Sk % GDP

685 77% 991 112%206 23% 364 41%478 54% 628 71%

Bln. Sk % GDP Bln. Sk % GDP Bln. Sk % GDP

1 676 189% 895 101% 2 571 290%570 64% 304 34% 874 99%

1 106 125% 590 67% 1 697 191%IPD Active Members

IPD (D+S) TOTAL IPD

IPD TotalIPD pensioners

IPD Old age pensioners

IPD Active Members

OUTPUTS IPD Olg Age

OUTPUTS MEN WOMEN

IPD Old Age

Real discount rate 1,03 1,03

Real old age pension index 1,01 1,01Replacement ratio (net/gross) 54,3 47,3

Working (insurance) period 40 35Real wage growth index 1,02 1,02

INPUTS MEN WOMEN

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Explicit Surpluses and Deficits of the Current Pension System as a % of GDP

Balance of the Reformed I. Pillar without increasing the Retirement Age

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Basic Documents

Concept of transformation of the social sphere (1995) State social support Social assistance Social insurance

Concept of social insurance reform (2000) Sickness insurance Work injury insurance Pension security

I. pillar (covered by Social Insurance Law – as from1.1.2004) II. pillar (covered by Law on old-age pension savings – as

from 1.1.2005) III. pillar (covered by Law on supplementary pension savings

– now amending)

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The New Slovak Three Pillar Pension System

Two-Pillar

Mandatory

System

Voluntary

System

I. PillarUNFUNDED

II. PillarFULLY-FUNDED

III. PillarVOLUNTARY

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Contribution rates as from 1. 1. 2005

Monopillar system

Duopillar system

I. pillar I. pillar II. pillar

employee employer employee employer employee employer

Sickness insurance 1,4 % 1,4 % 1,4 % 1,4 % – –

Old-age insurance 4 % 14 % 4 % 5 % – –

Old-age savings - - – – – 9 %

Disabilityinsurance

3 % 3 % 3 % 3 % – –

Reserve fund – 4,75 % – 4,75 % – –

Work injury insurance – 0,8 % – 0,8 % – –

Garanty insurance – 0,25 % – 0,25 % – –

Unemploymentinsurance

1 % 1 % 1 % 1 % – –

Health insurance 4 % 10 % 4 % 10 %

TOTAL 48,6 % 48,6 %

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First Pillar Reform – Social Insurance Law

New benefit formula (strictly neutral)

New indexation principle (Swiss indexation)

Increased assessment period (10+)

Increased retirement age (62 both genders)

Preferences abolished (universality)

New definition of disability

Entitlement conditions for W-w’s, W-er’s pensions equalized

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Timing of the reform – basic element of the success in the case of Slovakia

2002 – election year, new reform oriented government (4 political parties)Strong emphasis for the pension reform with substantial funded element2003 – the year of preparation and amendment of the pension reform lawsBeginning 2004 – minority in the Parliament, „hard time“ for any deep reformOpposition partially supported the reform, unions wanted smaller II. PillarConclusion - if the pension reform not passed in 2003 – it would be no strong reform

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Second Pillar Introduction – Law on old-age pension savings

Mandatory for those who have never been insured by Social SecurityNew single-purpose companies – Pension AM Companies, transfer through CR in Social Insurance AgencyContribution rate 9 % paid solely by the employer10 years minimum savings period requirementSpecial transitory reserve fundSaver’s ownership of pension fund’s moneyAnnuities paid by life insurance companies, free disposal paid by Pension AM Companies

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Structure of the II. pillar

Pension AM Company

Financial Market Authority

Central Registry

Employer or State

PF-GrPF-Cons PF-Bal

Social Insurance AgencyDEPOSITARY

Saver

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Implementation stage – task of the day

Law on old-age pension savings adopted in December 2003, after president veto again in January 20042005 – Year of secondary regulations (also possible amendment of the Law)Around 10 secondary regulations, couple of manuals2 working groups (MoL, MoF, FMA, SIA)Consultants (local and foreign)

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Expectations

Relatively small local market

Expected nb. of people joining II. pillar – around 1000000 (30 - 50 % of the workforce)

Expected nb. of applicants – around 5

Assets under management in first year – around 10 bln SKK (around 300 mil USD)

Each next year – additional 450 mil USD

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Second Pillar Reform Strategy –Right way?

Diversification of sources of financing - security

One-time privatization resources - effectivity

Shift to mixed DB and DC system - balancing

Part of IPD removed – responsibility

Attempt to acquire possible higher capital market return in comparison to labour market return - challenge

Level of knowledge of financial principles in financing the old - age improved - education