Peter PénzešPension Funds Regulatory Department
National Bank of Slovakia
Private pension system in Slovakia
CEIOPS OPC Meeting, Frankfurt am Main,
7 September 2007
2
Slovakia at a glanceEU Member: May 2004
Population: 5 393 637 (2006)
Working population:
2 301 400 (2006)i.e. 43 % of population
Retired population:
960 989 (2006)i.e. 17,8 % of population
Financial market supervisor and regulator:
National Bank of Slovakia (integrated authority)
Structure of the presentation
Pension reform 2004 – 2005 1st pillar
overview
2nd pillar and 3rd pillar overview contributions investments benefits
Final remarks
5
Pension reform 2004 – 2005 (cont.)
1st pillar replacement rates
44
46
48
50
52
54
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Year
Source: SIA
6
Changes in the 1st pillar (higher retirement age)
Introduction of the 2nd pillar
Transformation of the 3rd pillar
Pension reform 2004 – 2005 (cont.)
7
Design of the Slovak multi-pillar pension system (WB classification)
1st pillarsince 1907public, pay-as-you-go system
2nd pillar since January 2005private, personal, mandatory, fully funded, DC system
3rd pillar since July 1996 (DB); transformation 2005 – 2006 (DB DC)private, personal, voluntary, fully funded, DC system
Pension reform 2004 – 2005 (cont.)
8
Legal framework of the Slovak pension system
1st pillarSocial Insurance Act (No. 461/2003 Coll.)
2nd pillarOld-Age Pension Savings Act (No. 43/2004 Coll.)
3rd pillarSupplementary Pension Savings Act (No. 650/2004 Coll.)
Pension reform 2004 – 2005 (cont.)
10
administered by the state owned institution - the Social Insurance Agency (SIA)
supervised by the Ministry of Labour automatic enrolment of all workers and mandatory
participation for self-employed with income over a certain level prescribed by law ; anyone can join voluntary
contributions: 14% employer, 4% employee assets are deposited on the 0% interest rate account in the
State Treasury benefits: old-age pensions, early old-age pensions,
survivors’ benefits; automatic indexation of benefits on yearly basis
current replacement rate: 44,65%
1st pillar – overview
12
separation of 2nd pillar institution’s assets from assets of its members (pension fund)
member’s contributions go to its individual pension account
account balance is inheritable
January 2005 – June 2006 opened for all workers and self-employed individuals
since January 2005 automatic enrolment (default option – conservative fund) for new labour market entrants
2nd pillar – overview
2nd pillar – overview (cont.)
2nd pillar management institution - PAMC a Pension Asset Management Company legal personality - private joint stock company, professional
investor licensed and supervised by the National Bank of Slovakia
the only task: management of the pension funds de facto acts as an agent of members no involvement of employers on management of PAMCs
Pension Funds a pool of assets jointly owned by the members no legal personality minimum 50 000 members in all pension funds managed by
a PAMC
14
6 PAMCs
18 pension funds
1 545 916 members (as of June 2007)
42 bln. Sk / € 1,2 bln. of assets (as of June 2007) (approx. 2,4% of GDP)
2nd pillar – overview (cont.)
15
2nd pillar – overview (cont.)
Allianz – Slovenská DSS, a.s.
Aegon, d. s. s., a. s.
Axa d. s. s., a. s.
ČSOB d. s. s., a. s.
ING d.s.s., a. s.
VÚB Generali d.s.s., a. s.
2 takeovers in 2005 - 2006:Prvá dôchodková sporiteľňa, d. s. s., a. s. AllianzSympatia – Pohoda, d. s. s., a. s. ING
PAMCs:
16
2nd pillar – overview (cont.)
Market shares of the PAMCs
Allianz30%
Axa27%
VUB Generali13%
ING10%
AEGON13%
ČSOB7%
as of 2 March 2007
17
Each PAMC is obliged to establish 3 types of pension funds with different risk-return relationship:
conservative pension fund
balanced pension fund
growth pension fund
2nd pillar – overview (cont.)
18
Allocation of savers in the 2nd pillar pension fundsConservative fund
4% Balanced fund27%
Growth fund69%
2nd pillar – overview (cont.)
as of 28 February 2007
2nd pillar – overview (cont.)
2nd pillar security mechanisms
Licensing Prior approvals (fit and proper requirements) Supervision by the NBS Prudent person rules Internal control External audit Depositary bank Risk management (from January 2008)
19
2nd pillar – overview (cont.)
Guarantees in the 2nd pillar
The Minimum Return Guarantee (MRG) obligation of a PAMC to pay from its own assets to the
assets of the pension fund in case of underperformance to avoid major discrepancies among returns of pension
funds
Social Insurance Agency in case of fraud
20
21
2nd pillar - contributions
each member is allowed to be member of only one PAMC
contribution ceiling – triple the previous year monthly average salary
18%
9%
-0,5%
members SIA PAMCs
22
2nd pillar – contributions (cont.)
Proportion of the 2nd pillar assets to the GDP
0
4
8
12
16
20
24
2005
2007
2009
2011
2013
2015
2017
Year
% G
DP
Source: NBS, own calculations
23
2nd pillar – contributions (cont.)
Fee types and their ceilings in the 2nd pillar
the management feemax. 0,075% of the average monthly NAV of the pension fund (i.e. 0,9% of NAV p.a.)
the account maintenance fee max. 1% of the member’s monthly contribution (i.e. 1% of contributions p.a.)
The 1st pillar institution (the Social Insurance Agency) deducts a sum corresponding to 0,5% of the member’s
monthly contribution.
2nd pillar - investments
Allocation of pension funds’ investments Bank deposits
Bonds Shares and mutual funds
Conservative funds
38% - 55% 38% - 62% 0%
Balanced funds 17% - 41% 21% - 68% 11% - 16%
Growth funds 18% - 43% 22% - 63% 14% - 20%
24
Problem: too conservativePossible solution: charging based on performance?as of 30 June 2007
2nd pillar - investments
25
2,00%
3,00%
4,00%
5,00%
Conservative funds Balanced funds Growth funds
Returns of the 2nd pillar pension funds
20062007
26
Investment limits quantitative qualitative
Basic investment limits conservative pension fund - only bonds and money market
instruments in portfolio balanced pension fund - bonds and money market
instruments, max. 50% of equity in portfolio
growth pension fund - bonds and money market
instruments, max. 80% of equity in portfolio)
2nd pillar – investments (cont.)
27
Other investment limits
min. 30% of assets to be invested domestically derivatives allowed only for hedging purpose – problem:
sometimes hard to distinguish the purpose of the instrument
only indirect investment into real-estates allowed totally 17 investment limits, all stipulated in law
Problem: not very flexibleSolution: more qualitative investment rules, risk based
investment rules
2nd pillar – investments (cont.)
2nd pillar - benefits Programmed withdrawal + Life annuity Life annuity Survivors benefits (paid for the period of one year after the
members’ death)
Conditions for payment of the life annuity: min. 10 years of membership attainment of the retirement age
Programmed withdrawal paid by the PAMC Life annuity paid by an Insurance Company Survivors benefits paid by the PAMC/IC
28
30
3rd pillar overview
IORP Directive implementation
January 2005 – IORP Directive prudential requirements fully implemented to the Slovak 3rd pillar law
August 2006 - IORP Directive cross-border activities provisions implemented by an amendment to the 3rd pillar law
only 3rd pillar institutions fall under the IORP Directive
definition of the Slovak 3rd pillar institution is wider than IORP definition –personal pension system in Slovakia (however, most employers pay the contributions on a voluntary basis)
31
3rd pillar overview (cont.)
IORP Directive implementation
Ring-fencing, special investment rules applicability left to discretion of the NBS
Slovak Social and Labour Law: membership rules payment of contributions rules conditions for paying out benefits benefit plan legal relations between a member, a benefits’ beneficiary, an
employer and a IORP
32
separation of the 3rd pillar institution’s assets from assets of its members (supplementary pension fund)
member’s contributions go to its personal pension account
account balance is inheritable
voluntary participation of both employees as well as employers
tax incentives
3rd pillar overview (cont.)
3rd pillar overview (cont.)
3rd pillar management institution - SPAMC a Supplementary Pension Asset Management Company legal personality - private joint stock company, professional
investor licensed and supervised by the National Bank of Slovakia
the same principles apply as in case of 2nd pillar PAMC
Supplementary Pension Funds the same principles as in the 2nd pillar except for minimum
number of members
34
5 SPAMCs
13 supplementary pension funds
716 383 members (as of December 2006)
21,5 bln. Sk / € 637 mil. of assets (as of December 2006) (approx. 1,3% of GDP)
3rd pillar overview (cont.)
35
3rd pillar – overview (cont.)
Aegon d. d. s., a. s.
Axa d. d. s., a. s.
DDS Tatra banky, a. s.
ING Tatry – Sympatia, d. d. s., a. s.
Stabilita, d. d. s., a. s.
SPAMCs:
36
Market shares of the SPAMCs
Stabilita16%
Aegon0%
Axa15%
DDS Tatrabanky32%
ING T-S53%
3rd pillar – overview (cont.)
as of December 2006
3rd pillar – overview (cont.)
3rd pillar security mechanisms the same as in the 2nd pillar
Guarantees in the 3rd pillar no guarantees
37
38
The SPC is obliged to establish two types of funds:
at least one Contributory pension fund an investment strategy is entirely up to the 3rd pillar
institution; however, quite strict investments limits and one Paying-out pension fund
very strict investment limits (high liquidity) when a member asks for payment of benefits that are
paid by the SPAMC, the 3rd pillar institution is obliged to transfer member’s account balance from the Contributory pension fund to the Paying-out pension fund.
3rd pillar – overview (cont.)
39
3rd pillar - contributions
each individual is allowed to be member of several SPAMCs;
no contribution ceiling
members PAMCs
40
3rd pillar - contributions (cont.)
Fee types and their ceilings in the 3rd pillar
the management feemax. 3% a year of the average yearly NAV of the pension fund
the SPAMC switching fee max. 5% of the member’s account balance in the first five years after concluding a contract with the member and max 1% thereafter
the termination settlement feemax. 20% of the member’s account balance
3rd pillar - investments
41
Problem: too conservative, the same picture as in the 2nd pillarPossible solution: charging based on performance?as of 30 June 2007
Allocation of the supplementary pension funds’ investments
Bank deposits
BondsShares and
mutual funds
37,11% 56,23% 7%
42
Investment limits quantitative qualitative
Investment limits linked to those in the 2nd pillar with the few exceptions (no 30% limit on domestic investments, etc.)
Problem: too restrictive for the system with voluntary participation
Solution: more qualitative investment limits, risk based investment limits
3rd pillar – investments (cont.)
3rd pillar - benefits life annuity life annuity + lump-sum settlement (max. 50%) temporary annuity temporary annuity + lump-sum settlement (max. 25%) termination settlement
Conditions for payment of the annuity: min. 10 years of membership age of the member – min. 55 years
temporary annuity, lump-sum settlement, termination setlement paid by the SPAMC
life annuity paid by an Insurance Company
45
Final remarks
Tax issues
2nd pillar – ETE: contributions tax free investment returns taxed benefits tax free
3rd pillar – ETT: employee’s contributions tax deductible up to 12.000 Sk
a year, employers’ contributions tax deductible up to 6% of employees’ salary
investment returns taxed benefits taxed
46
Final remarks
Current regulatory challenges: Low returns Risk management Transition from accumulation phase to pay-out phase Depositary bank tasks Internal control tasks
Current political challenges: 1st pillar deficit - more people than expected joined the
2nd pillar (700.000 expected vs. 1.500 000 actual members)